Aggressive rate rise may push yields up

Market players expect a hit to the bond market only if the Reserve Bank of India (RBI) raises policy rates by more than 25 basis points in the third quarter monetary and credit policy review on Tuesday.

“A rise of 25 basis points has already been factored in by the market. If policy rates are raised by 50 basis points then yields on benchmark 7.80 per cent government security will go up to a maximum of 8.25 per cent,” said a treasury official from a large public sector bank. The benchmark government bond 7.80 per cent maturing in 2020 settled at 8.16 per cent on Friday.

The apex bank has time and again expressed concern over the rising inflation and the need to curb inflationary expectations. Inflation has been sticky at elevated levels on the back of rising food prices.

In December, the wholesale price index was up at 8.43 per cent from 7.48 per cent in November. Food inflation data was at 15.52 per cent for the week ended January 8 as compared to the corresponding period a year ago.

Also, the volumes are expected to be low on Monday as investors await the policy announcement on Tuesday.

On the other hand, liquidity is relatively comfortable. “Liquidity is not a problem now since banks have picked up the necessary reserves in the first week itself for the fortnight (ending January 28),” said C V R Rajendran, general manager (treasury), Corporation Bank. Markets may sport a rally if liquidity easing measures are taken, he added.

Hence, call money is expected to be stable in the week. “It will be in the range of 6.25-6.75 per cent, as seen last week,” said a bond dealer with a brokerage firm. Call money closed at 6.60-6.70 per cent on Friday.