Hike in 10 Yr govt.bonds: Car and home loans turn expensive

Auto and home loans are all set to become more dearer as the yield on government bonds jack up by almost 9%. Tagged as the benchmark for the ROI in the market which consumers are liable to pay, heating up of the 10-year government bonds tip-off the market players about a potential increase in the lending rates of banks.

According to economists, a rise in benchmark yield can also be apprised as a rise in cost of funds for different money lenders and banks. This, in the long run, leads to higher interest rates for all kinds of loans such as cars, home, official borrowings and durables.

Heading for a fall

While rate of inflation and benchmark yields are interrelated, yield of a bond is inversely proportional to its price. During selling of bonds, prices go downhill and yields shoot up. According to market players, the benchmark yield is expected to elevate to 9.25-9.30%.

The 10 year 7.16% G Sec(government securities) 2023 trimmed down to 1bp to 8.48%. Due to a number of factors, the 10 year yield increased from 8.50% to 8.99% p.a. According to market experts, the government securities market is presently experiencing a tremendous demand-supply mismatch. RBI’s lack of any proactive step through open market operations(OMO) to purchase a part of the additional supply, has made matters further worse.

Cause and solution

Local along with global factors have significantly contributed to the increase in rates in India. On the local front, the central bank recently taken steps check liquidity to stem the weakening rupee has not yet impacted in the expected manner and is directing bond market players to allocate high uncertainty premiums to G-sec rates.

With a note of concern, fund managers suggest that the government has to take initiative to force in confidence among the investors and that is expected to bring in stability in the bond market. Once stability kicks in, potential investors would invest again and that would soften the rates.

In a move to help the oil agencies meet their demand for dollar, the RBI has offered the companies a special window. Initiated few months back, such a window will help the oil companies import crude oil by purchasing directly from the central bank, instead of interbank market. Such an initiative has been taken by the RBI since oil companies are considered as the biggest dollar buyers of the nation and have contributed towards toning up of rupee from 69 levels to 61.