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Will rising bond yields hurt bank rate-cut chances?


MUMBAI: Surging bond yields may limit the ability of high-street banks in India to lower funding costs further and bring them in kilter with the 200 basis-point reduction in policy rates since January 2014, signaling a likely pause in the four-year cycle of easing in Asia's third-biggest economy.

"With the latest spurt in yields, the overall market rates have gone up, making it difficult for banks to reduce them further," said Karthik Srinivasan, Senior Vice-President at ratings agency ICRA. "Although the central bank insists on monetary policy transmission, banks may have little option. A downward revision of rates would now become a thing of the past, and we are probably done with the soft interest-rate cycle, and may see an extended pause in policy action."

The benchmark bond yield jumped 83 basis points in about five months, leading to an overall increase in market rates amid signs of growth in bank loans. In its bi-monthly policy, the Monetary Policy Committee of the Reserve Bank of India (RBI) urged lenders to reduce funding costs to reflect the previous reductions in policy rates.

Non-food credit, or loans given to companies and individuals, has risen 10% year-on-year to about Rs 79.58 lakh crore, showing signs of improvement despite mounting bad loans.

Since January 2014, the RBI has slashed the policy rate by 200 basis points, although lenders have trailed the regulator in lowering the cost of funds. Marginal Costs of Fund Based Lending Rate (MCLR), introduced in early 2016, is still elevated, with some lenders offering as high as 10.20-10.50%.

According to ICRA, mounting concerns over fiscal slippage and a reversal in the systemic liquidity surplus have hardened government bond yields. The benchmark yield jumped to 7.27% in December, the highest in about 17 months.

Treasury bills, or short-term sovereign securities with up to one-year maturities, are now offering rates four to 13 basis points higher compared to levels seen about a month ago. Yields have gone up across three maturities.

"We are in a free market where the government's borrowing cost has been rising since the past six months," said Harihar Krishnamoorthy, head of treasury at FirstRand Bank. "A combination of market liquidity, government fiscal concerns and other factors triggered a rise in bond yields."

Cash availability in the banking system has just slipped into the deficit mode after a year, leading to the hardening of rates.

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