Yields shoot up, as RBI surprises with 50-bps rise

The higher-than-expected rate rise by the Reserve Bank of India (RBI), pushed yields on the 10-year benchmark government bonds by 15 basis points on Tuesday. The yields touched 8.40 per cent minutes before the announcement of the first quarter policy review.

The yields had closed at 8.29 per cent on Monday and opened at 8.30 per cent on Tuesday. But it shot up by around eight points within 10 minutes before the policy announcement at 11 am. Later in the day, yields closed at 8.44 per cent to absorb the rise. RBI raised the repo rate by 50 basis points to eight per cent. “We were surprised because the market consensus was at 25 basis points. Hence, yields had to adjust to the new rates,” said a bond dealer.

RBI Governor D Subbarao said the intention was not to surprise the markets. “The hike is to reconfirm RBI’s objective to control inflation.”

The yields are expected to harden further. “The minimum borrowing rate is at eight per cent, so yields will have adjusted to the 8.40 per cent levels. They may further go up to 8.55 per cent, as market sentiments are quite bearish,” said a bond dealer with a domestic brokerage.

At the shorter end, interbank call rates ended below the new repo rate, as most banks had covered borrowing needs from RBI’s repo window. The weighted average call money rate was at 7.68 per cent. Banks borrowed Rs 72,710 crore from RBI’s liquidity adjustment facility.

RUPEE ENDS AT THREE-MONTH HIGH
THE rupee charted a robust appreciation, gaining 22 paise against the dollar on Tuesday. Markets said foreign banks took advantage of the weakness in the dollar against other global currencies, as there was uncertainty over the US government to raise the debt ceiling. Dollar-buying by oil companies capped the gains. Rupee closed at 44.18 against the dollar. The Indian currency was at 44.40 against dollar on Monday.