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A repo rate cut is imminent, as the government wants to boost the GDP growth. The Repo rate is what RBI charges for overnight, i.e. one-day maturity, lending to banks. Normally, short-term interest rates are below long-term rates, which results in an upward sloping “yield curve”; reflecting higher yields for longer-term investments. What we are now seeing is the reverse, with the cost of 10-year money being lower than that of one-day money. An “inverted” yield curve, in other words.
An inverted yield curve is usually associated with the specter of an impending recession. When short-term interest rates shoots above its long-term rates, it points to lack of lending opportunities for projects that take into account prospects for the economy beyond the immediate future. If that outlook is poor, nobody would want to borrow for the long-term and automatically the demand for funds get shrunk; in the short end of the market. This may, however, be an exaggerated view in the present circumstances. The inverted yield curve according to many analysts, seems to be SYNTHETIC, having more to do with a deliberate RBI move to keep policy rates high to make the Indian Bonds look attractive. Hence, the rates are all set to go down in the near term. It is pertinent to note that the Foreign Institutional Investors, for instance, have poured in $25.3 billion into India’s debt markets so far this year, as against just $ 16.5 billion of net equity purchases. Returns on Indian bonds are among the highest in the world today. The last auction of 10-year government security on November 28 fetched a yield of 8.1 per cent, on a CPI of 6 per cent, translating into a real return of over 2 per cent. For global investors, an 8 per cent return is great, especially when the INR as of now is more or less stable (unlike last year) and 10-year bond yields are ruling at 0.4 per cent in Japan, 0.75 per cent in Germany and 2.3 per cent in the US. It makes good business to borrow overseas in Dollars or Yen and invest in Rupee-denominated Indian bonds. Yields decline, when there is expectation of interest rates falling. It results in high demand for bonds that were issued at high coupon-rates. As high demand pushes bond prices up, their yields drop correspondingly – to even below the original coupon rates. The declining bond yields, are simply on account of the markets factoring in near term interest rate cuts — which they see as inevitable in a context of global "Crude-Price-Crash", reinforcing bearish pressures on other commodities as well.
The Nifty is likely to trade range bound, till some major news gives it a sway in the either direction.
In another very important development the board of ULTRATECH CEMENT LTD has approved purchase of two cement manufacturing units of JAIPRAKASH ASSOCIATES LTD in Madhya Pradesh for Rs.54 bln (Rs.5400 Cr). This is very good news for the shareholders of J P Power Ltd (Rs.12.10) and J P Associates Ltd (Rs.26).
On the positive side, the Union Cabinet is likely to consider bringing out ordinances to push through reforms in two key sectors of insurance and coal.