Gilt yields may fall further on rate cut hope

Gilt yields are expected to ease further this week as the street expects the Reserve Bank of India (RBI) to cut the cash reserve ratio (CRR) in the second quarter review of the monetary policy on Tuesday. Some experts also expect a cut in key policy rates.

“The expectation is for delivery of 25 basis points cut in CRR and policy rates. There will be post-policy price stability in 10-year benchmark gilt yields at 7.95-8.10 per cent,” said J Moses Harding, head–asset liability committee and economic and market research, IndusInd Bank. According to Harding a day before the policy on Monday, the 10-year benchmark gilt 8.15 per cent 2022 may trade in the range of 8.10-8.15 per cent. It had closed at 8.13 per cent on Thursday compared with the previous close of 8.14 per cent.

Friday was a bank holiday due to Bakrid. Most experts expect a cut in CRR because liquidity has been tight and this is evident from the fact that borrowings by banks under RBI's Liquidity Adjustment Facility had once again crossed the Rs 1 lakh crore mark on Thursday and stood at Rs 1,01,420 crore.

The rupee which closed at Rs 53.58 against the dollar on Thursday compared with the previous close of Rs 53.74 is expected to strengthen. “Since this is the busy season, the RBI may announce few moves in the second-quarter monetary policy review which will help in strengthening the rupee against the dollar. There may be further relaxation in external commercial borrowing norms or export credit relaxations,” said S Srinivasaraghavan, executive vice president and head of treasury, Dhanlaxmi Bank.

According to IndusInd’s Harding the rupee may trade in the range of Rs 53.30-54 against the dollar this week.