Banks jettison gilts on repo rate cut
MID-TERM REVIEW OF ANNUAL POLICY 2004-05/ DIFFERENT STROKES
| Prices of long-term gilts fell by almost Re 1, and short- and medium-term securities' prices declined in the range of 40-70 paise immediately after the Reserve Bank of India (RBI) announced its mid-term credit policy. |
| Dealers said a wave of selling swamped the markets after the RBI governor announced the report. Boosted by the encouraging statements by the finance minister, ministry officials and the RBI governor himself, some banks had taken positions on the premise that the apex bank will not tinker with rates, at least in this policy. |
| Though the bank rate was left unchanged, a 25 basis point hike in the repo rate jolted these expectations, and banks queued up to sell gilts. |
| Banks which had bought gilts in the last few days on expectation of no hikes in the repo rate started dumping the papers, leading to an avalanche of selling. |
| The price of the benchmark 10-year paper (7.38 per cent 2015) hit a low of Rs 103.25 (6.92 per cent) before closing at Rs 104.40 (6.80 per cent). |
| "The signal is clear that interest rates are going up. Going forward, the benchmark paper is expected to stabilise at an yield of around 6.70-6.80 per cent. Moreover, it will take some time for the market to stabilise," said A S Khurana, general manager, treasury, Bank of Baroda. |
| In the forex market, the spot rupee dipped to close at 45.6850/69, after opening at 45.64/65. The premium on forward dollars shot up in reaction to the repo rate hike and apprehensions that the demand for forward dollars will go up in the coming days, dealers said. |
| The six-month and one-year dollars were available at a premium of 2.78 per cent and 2.36 per cent (annualised) over the spot rate, as against 2.58 per cent and 2.12 per cent, respectively, on Monday. |