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P. Devarajan

SOME primary dealers and a few, upstart new private banks seem to be holding positions in the bond market hoping for a cut in Bank Rate on October 29 by 50 basis points to 6 per cent. But others prefer to wait, fearing huge hits if the RBI Governor, Dr Bimal Jalan, does not oblige.

In the last two days, a prominent merchant bank seems to have sold to LIC Rs 100-crore worth of 30-year paper at 7.83 per cent (Rs 101.35). RBI fixed the cut-off yield for this paper at 7.95 per cent on August 28.

If there is a Bank Rate cut of 50 basis points, the benchmark 10-year paper could drop from the present yield of 7.07 per cent to 6.90 per cent and go down below the all-time low of 6.85 per cent over a month.

In case nothing happens, the yield on 10-year paper is expected to touch 7.25 per cent, going up further to 7.45 per cent by end-December.

The Centre should not be worrying much over the market price of money, having completed about 85 per cent of its borrowings. With State Governments' not yet agreeing to any debt swap scheme, they will not be able to take advantage of the current low interest rates.

Over the last two years, RBI has been able to maintain a low interest regime in the absence of any growth signals. In the process, banks and primary dealers made profits betting on bond prices. In the current year, the hot spots on Mint Street have all shut down with kiosks hawking State Government bonds turning particularly risky. A point perhaps has come where pushing down yields in the bond markets is not going to pay till the real economy performs.

Going by talk on Mint Street, the Finance Ministry and RBI are more concerned over the absence of any positive changes in the investment scenario.

"Old-fashioned capital formation is a must for a developing country like India and that's not happening. The Vajpayee Government is in deep snooze with the Prime Minister, Mr Atal Behari Vajpayee, particularly keen on holding to the throne at any cost.

No economic decision has been taken over the last three months in New Delhi when the players eagerly await the start of play. Making money in the bond markets is not the principal job of banks nor RBI,'' said an experienced dealer.

One could not disagree.

... ... ... ... ... ... ... ... ... ...

CAN RBI think of telling banks to put aside 10 per cent to 15 per cent of total net advances as of March 31, 2002, for infrastructure at 10 per cent per annum? And any bank falling out of line penalised heavily. Today, there is no penalty on banks not touching the 18 per cent norm for agriculture. No bank cares to hit the target, as RBI does not cull out the non-performers.

It may look odd with the Narasimham Committee arguing for lowering of the 40 per cent priority sector norm from 40 per cent to 10 per cent. But the Indian bankers appreciate RBI commands and there seems no way out.

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