Bond yield to be range-bound ahead of RBI policy

The yield on the 10-year government paper may move in a narrow band on Monday ahead of Reserve Bank of India’s (RBI’s) annual monetary and credit policy for 2010-11.

Dealers said treasuries would prefer to tread a cautious path ahead of RBI’s policy to be unveiled on Tuesday. There is wide expectation of a small hike (25 basis points) in short-term interest rate in policy to rein in inflationary expectations. In March, RBI, as a clear shift to tight monetary policy, had raised the repo rate (to borrow from the Central bank) and reverse repo rate (to place money with the Central Bank) by 25 basis points each. The events in US market and uncertainties in Europe over sovereign bonds would also have a bearing on the market mood. The government bonds could gain on Monday tracking the big rise in US treasury notes on Friday.

On Friday, the yield on 10-year bond (6.35 per cent 2020) at close was 8.08 per cent. The turnover on the Negotiated Dealing System was Rs 8,640 crore. Most traders refrained from big purchases ahead of the policy. Selling was not aggressive, but there was hardly any buying interest either. This dragged prices down, said a dealer with a public sector bond house.

Senior State Bank of India group official said market may witness volatility on Monday and Tuesday on effect of developments in US (Securities and Exchange Commission charging financial services group Goldman Sachs with fraud).

Call rate may remain stable
The interest rates in the inter-bank overnight lending market are expected to remain stable on ample liquidity in the system on Monday. They, however, could inch up on Tuesday if RBI hikes the repo and reverse repo rate in policy. On Friday, the systemic liquidity was comfortable and the money market rates were stable. However, there was a considerable fall observed in amount banks parked at RBI’s reverse repo facility under Liquidity Adjustment facility (LAF). RBI absorbed Rs 39,950 crore against Rs 53,460 crore absorbed yesterday.

Rupee may weaken
Rupee may fall against the dollar on prospects of Foreign Institutional Investors Investor’s (FIIs) triggering sale on stock markets, foreign currency dealers said. The currency weakened last week on concerns of FIIs pulling out as the BSE 30 benchmark index dipped by 1.9 per cent last week. The rupee is expected to weaken further next week as banks may buy more dollars anticipating outflows of FIIs’ capital triggered by weakening sentiment.