Rate cut effect: Bond yields inch higher; rupee ends weak

More banks may cut deposit rates

The cut in repo rate on Tuesday has made lenders reduce deposit rates but the monetary policy has not been beneficial for the bond market.

The Reserve Bank of India (RBI)'s hawkish tone had made bond yields rise on Tuesday. The trend continued on Wednesday, too. On the other hand, the depreciating bias for the rupee continued, as foreign investors were seen selling their investments in the domestic markets.

RBI had cut the repo rate, at which banks borrow from it, by 25 basis points on Tuesday at the policy review. This led to some banks reducing their deposit rates and more might take that route.

Public sector Punjab National Bank reduced the interest rate on domestic term deposits in select maturity buckets by 25 basis points. The new rates will be effective from June 8 while largest private sector lender ICICI Bank and Axis bank have also reduced the rates on bulk deposit. While ICICI Bank has cut the bulk deposit rate (above Rs 1 crore) by 5-25 basis points, Axis Bank has cut bulk deposit rate (above Rs 5 crore) by 10-20 basis points. On Tuesday, apart from reducing the base rate, State Bank of India also reduced the interest rate on short-term deposits by 25-50 basis points.

Vibha Batra, co-head-financial sector rating, ICRA, said it would be tough for banks to make a substantial cut in interest rates on term deposits, as alternative savings instruments carried higher rates. The lenders would focus on changing big-ticket deposits in line with call rates.

Banks have been reducing the interest rate on term deposits since October. In the latest round of rate reductions, the extent of cuts might not be in the same proportion as in 2014-15. That is even before RBI started to cut the repo rate in January 2015. Since January this year, the repo rate has been cut by 75 basis points and it now stands at 7.25 per cent.

The yield on the new 10-year bond, meanwhile, rose to end at 7.74 per cent on Wednesday, compared with the previous close of 7.72 per cent. The yield on the old 10-year bond ended at 7.95 per cent against the previous close of 7.93 per cent. On Tuesday, after the RBI policy, the yield on the new and the old 10-year bond had risen to end up by eight and 11 basis points, respectively.

R Sivakumar, head of fixed income at Axis Mutual Fund, said: "Global bond market yields also rose last night and tracking that today yields have risen. Yesterday too while the rate cut happened, the guidance was hawkish. Though macro conditions have supported a rate cut, the near-term risks to inflation are on the upside due to rising crude, monsoon related concerns, etc."

Corporate bond yields have remained high. This, said issue arrangers, made companies to not opt to raise funds through bonds, as this would have been an expensive route.

The rupee ended weak on Wednesday against the dollar at 63.91 compared with the previous close of 63.83. During intra-day trades, the rupee had even breached the 64-mark and touched a low of 64.07 a dollar.

Sandeep Gonsalves, forex consultant and dealer, Mecklai & Mecklai, said: "The weakness in the rupee was due to foreign institutional investors pulling out of domestic markets and some dollar demand by corporates. The central bank had intervened in the market today to arrest volatility in the rupee."