Surging bond yeilds delay recovery, vanish rate cut hopes

Mumbai, Jan 5 (PTI) The ongoing surge in the bondyields will push back lending rate cuts and delay the fragileeconomic recovery, and there is a need for the Reserve Bank tocool them down, says a foreign brokerage."We think the challenge for the central bank is tocomfort the markets with a mix of confidence-buildingmeasures, as the rising yields push back lending rate cuts anddelay the recovery," American brokerage Bank of America MerillLynch said in a note today.The "easiest way" to cool the government securitiesmarkets will be to cancel the extra government borrowing of Rs50,000 crore announced last month and fund the possible fiscalslippages by drawing down the government surplus cash balanceswith the RBI, it said.The bond yields surges on average by 47 bps in theDecember quarter and had touched 7.44 per cent in the lastweek of December, putting banks in a quandary, as their mark-to-market losses for the quarter is pegged at Rs 15,000 crore.The brokerage said over the past three years,government has been running surplus cash balances with the RBIaveraging Rs 1.50 trillion on last March 31, which areaccumulated through higher-than-budgeted small savingcollections, surplus of state governments parked inintermediate T-Bills and non-competitive bids and advance taxpayments in the March quarter.The brokerage also advised the finance ministryagainst drawing from RBI's contingency reserves created frompast profits and from the central bank's currency and goldrevaluation accounts,which is a buffer against adverse foreigncurrecny movements.Bond buybacks by government, where it has done Rs30,000 crore as against a budgeted Rs 75,000 crore, can alsocalm the G-sec market, it said.Open market operation by the RBI of over Rs 50,000 crore "would be the strongest signal as that would not only supply durable liquidity but also re-assure market concerns on the yield curve", the report said.

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