Yields seen up if RBI maintains hawkish stance

Markets have already priced in a rate rise of at least 25 bps.

The Reserve Bank of India (RBI) will announce the first quarter review of monetary and credit policy on July 26. Yields may harden if there are any indications of further rate rises.

Markets have already priced in a rate rise of at least 25 basis points in the upcoming policy review. However, it remains unclear on the course of policy rates thereafter. “At the upcoming review, more than the call on interest rate, the guidance on policy and inflation over the short term would take precedence,” said IDBI Bank in a research note.

RBI has increased policy rates by 275 basis points since March 2010, citing inflationary pressures. The Wholesale Price Index (WPI) is still above RBI’s comfort zone. The WPI for June was 9.4 per cent.

The yield on the 10-year benchmark government bond closed at 8.31 per cent on Friday. “Yields may move up to 8.40 per cent if the policy tone is hawkish,” said K Ramanathan, chief investment officer of ING Investment Management. Yields have come off 8.40 per cent levels since May.

At the shorter end of the curve, call rates have been hovering at a spread of up to 20 basis points above the RBI repo rate which is at 7.50 per cent. The weighted average call rate, which is the RBI’s target rate, is expected to move up as it adjusts to the new policy rate corridor after rate rise. However, strong demand from banks ahead of the policy may push up the rates tomorrow.

The government is scheduled to borrow Rs 12,000 crore via sale of dated securities this week. Also, RBI will auction Rs 7,000 crore worth of 91-day treasury bills and Rs 3,000 crore worth of 364-day treasury bills on Wednesday.

Last week, the government said it would not borrow more than Rs 4,17,000 crore as planned and will manage short-term mismatches with the help of cash management bills. RBI had auctioned Rs 12,000 crore via two issuances of cash management bills last week.