Rate rise factored in, bond yields fall on global cues

The debt market remained largely unaffected by the policy rate increase of 25 basis points on Thursday. Yields on the 10-year benchmark 7.80 per cent government bond eased 10 bps instead, on the back of mounting uncertainty in growth prospects of the global economy.

The Reserve Bank of India (RBI) said in its mid-quarter review that factors like high global commodity prices, the Japanese earthquake, monetary tightening in emerging market economies and uncertainty in resolution of the sovereign debt problem in the euro area had increased the downside risks to global growth prospects.

“The rate hike was in line with market expectations and was already factored in. The bond market has reacted to the global events, with the outlook for growth globally having deteriorated inthe past couple of days,” said Piyush Wadhwa, executive director & head, rates trading-India, Nomura.

RBI said the global economy weakened in the April-June quarter and lead indicators suggested growth moderation in both advanced economies and emerging markets. It maintained its earlier outlook on domestic growth but said that given the high degree of integration with the global economy, recent macroeconomic developments abroad pose some risk to domestic growth. The central bank said one objective of on Thursday’s rate rise was to mitigate the risk to growth from potentially adverse global developments.

“We expect the 10-year benchmark government bond to trade between 8.4-8.5 per cent, going forward,” said Hemant Mishr, managing director and head-global markets, South Asia, Standard Chartered Bank.

On the shorter end, it is expected the rates would not show significant movement. “The overnight call rates will adjust to the new corridor but the rates on the certificates of deposits (CDs) and commercial papers (CPs) will stay largely unaffected,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.

The weighted average rate on overnight interbank call money closed at 7.43 per cent on Thursday, up from 7.36 per cent yesterday. CDs maturing in three months were issued at around 9.3 per cent and one-year CDs at 9.85 per cent on Thursday. The volumes in the CP market stayed muted, due to high rates and lack of investor appetite.