Despite Singur West Bengal remains upbeat

News about a country/state usually leads to changes in the yields in the Bonds of the respective country/state. The impact of bad news on the bond markets differ. Bad news like higher than expected fiscal deficits, high inflation, poorer investment climate, rating agencies downgrade etc should lead to lower prices (yields hardening). Other bad news like lower GDP, higher unemployment leads to higher prices (easing of yields) as markets expect central banks to start easing interest rates.

However, in the case of West Bengal, we don’t see the logic working. West Bengal has been criticised for its handling of Singur Tata Nano project. As Tatas withdraw from the state, others like Infosys are also planning to withdraw. This will lower investments in the state of West Bengal. Investment is key to growth, and leads to higher employment and higher taxes as well.

THis should have showed in yesterday’s auctionof Bonds (called as State Development Loan) issued by West Bengal. The Bond on offer was for 10 years (all state bonds are mostly of 10 year) and was for 1800 cr.

However, the cut-off yields announced in the auction were 8.80%. The 10 year government bond yesterday was at 8.39%. The difference in yields between a 10 year India government bond and West Bengal government Bond was just about 51 bps.

A pervious West Bengal Bond auction worth Rs 800 cr on 31 July 2008 saw cut-off yields  of 9.90%! The 10 year yields of government bonds then were 9.32% and this implies a spread of 58 bps. The recent sentiment in Bond markets is very bullish and the yield for West Bengal in the latest auction was expected to decline as well. But atleast we should see a higher spread between Centre and State or a lesser easing. The central government 10 year bond yields have declined by 100 bps but for West Bengal it has declined by 110 bps.

So, overall risks for the state of West Bengal as assessed by financial markets have actually declined between July and September. The reality has been a lot different as clearly investment climate has worsened so we should see hardening of yields.

Overall I don’t understand the recent yield movement in goivernment bond markets in India. The markets have been rallying like crazy and yields have been easing sharply. The inflation is still very high and Prime Minister’s team itself said India’s fiscal deficit is much higher than reported. I would again like to reiterate the question I asked in my research paper- Are yields in sync?

2 Responses to “Despite Singur West Bengal remains upbeat”

  1. ezineaerticles » Blog Archive » Despite Singur West Bengal remains upbeat Says:

    […] Original Amol Agrawal […]

  2. Deepti Goel Says:

    read your paper ‘are yields in sync’…very enlightening for a novice like me. i have a suggestion—try regressing yield rates on various factors that may affect it, including RBI policy stance and see if you still get a correlation that is counter-theory…

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