The Reserve Bank of India (RBI) on Thursday set the cut-off yield in government paper auction at levels much higher than expected by the market. | |
| Some market men interpreted this as the first signal of a tightening in the domestic interest rate regime. The markets reacted negatively and prices of long-term paper fell by almost 70 to 80 paise from the day's high. |
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| The yield on the benchmark 10-year paper closed the day at 5.85/86 per cent, after having fallen in early afternoon. |
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| The RBI set the cut-off yield in the auction of Rs 2,000-crore, 24-year government bond 2028 at 6.70 per cent, and set a 19 basis point spread over the 364-day treasury bill yield for the Rs 6,000-crore floating rate bond 2015. |
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| The market was expecting the yield for the 24-year paper to be 6.65 per cent and the spread on the 2015 floater to be nine bps over the T-bill yield. |
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| Some market players interpret the RBI move as a possible signal to prepare the market for the impending tightening of interest rates. |
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| Others, however, hold different views. Dealers see the floating rate bond as a hedging mechanism and with a higher spread over the 364-day T-bill on the cut-off, the RBI is hinting at a lower rate on this T-bill, which acts a benchmark for short-term interest rates. |
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| With the RBI's action the positive glow in the markets after the 25-basis point Fed rate hike has almost vanished. Though in line with market expectations, the "measured hike" saw the spot rupee and government bond prices gaining ground during the day. |
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| The spot rupee opened lower at 45.95/96 as against a close of 46.04/06 on Wednesday. The yield on 10-year benchmark 7.37 per cent 2014 came down to 5.77 per cent in the day, compared to yesterday's closing level of 5.84 per cent. |
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