Bond yields to remain high

The yield on government bonds may stay elevated next week on apprehension that Reserve Bank of India (RBI) may hike cash reserve ratio as a signal to manage inflationary expectations.

While government has not scheduled any long-term bond offering this week, the fear of RBI act as early as this month would exert pressure on the market sentiment, dealers said.

On Friday, bond yields hardened. The G-Sec yields moved up amidst renewed fears of monetary policy action, looking at the inflation levels at present and the outlook for possible upside following a meeting between RBI governor and Union finance minister and higher cut-off set at the auction.

Devolvement on primary dealers at today’s auction further impacted the market sentiment negatively .

The yield on 10-year benchmark (6.90 per cent 2019 paper) moved up to close at 7.71 per cent as against previous close of 7.64 per cent, according to Negotiated Dealing System data.Central government and eight states are raising Rs 10,900 crore in the week. State governments would issue 10-year development bonds worth Rs 4,965 crore on December 23.

Call rates may rise
The interest rates in the interbank market rates may rise as demand from banks is generally high in the first week of reporting fortnight.

The outflow on account of advance tax payments has reduced the excess cash in the banking system.

If call rate inches higher, bids at RBI’s reverse repo window may fall as banks would like to deploy funds at higher rate in the market.

On Friday, the liquidity situation in money market remained slightly tight with the LAF deployment volumes declining further.

The overnight call rate was seen in a range of 3.10 to 4.75 per cent. RBI absorbed Rs 38,350 crore under reverse repo operation. It did not infuse any amount under repo operation.

Rupee main gain strength
Fluctuation in the value of the dollar against other international currencies and nature of demand for greenback in domestic market will impact the rupee.

Rupee improved to close at 46.72 against the dollar. The forward premium rates hardened further and the six-month forward premium was at 2.97 per cent.Weak local stocks and sustained dollar demand from oil companies and other importers had kept pressure on the rupee.