Bond yield to remain range-bound

The yield on government bonds is likely to remain in a narrow band, as the market awaits the outcome of the meeting between the Reserve Bank of India (RBI) and finance ministry officials on the government’s borrowing programme for April-September 2010.

Dealers said the yield on 10-year benchmark (6.35 per cent 2020 paper) had moved up beyond 8-per-cent mark for a while on Monday as reaction to RBI’s rate hike action. Later, yields eased and have been range-bound.

On Friday, the yield on benchmark paper at close was 7.85 per cent.

RBI raised key policy rates by 25 basis points to curb inflationary expectations and this is seen as a beginning of rising rate cycle. There is expectation that the government would issue fresh 10-year paper in the early part, which may set the tone for yield trend. Besides the huge borrowing programme, an uptick in inflation would also weigh on the yields.

The government has indicated that it would raise Rs 457,000 crore from market in 2010-11.

Liquidity to be adequate
The interest rates in the inter-bank lending market are expected to remain close to reverse repo rate (3.75 per cent) on adequate liquidity in the system. Treasury executives said call rate had moved up on Friday.

Rupee may remain firm
The foreign fund flows in the stock market and signs of global weakness may keep Indian rupee firm against the US currency. On Friday, the rupee closed at an 18-month high against the dollar at Rs 45.23 on the back of huge inflows from foreign institutional investors and dollar sales from exporters.

On Thursday the rupee had closed at 45.51. Dealers said the inflows were occurring before the 3G-spectrum auction due in the first week of April.