Yields sticky prior to policy announcement

The yield on the 10-year benchmark 7.8 per cent government bond is expected to be above 8.1 per cent this week, owing to expectations on the annual policy announcement by the Reserve Bank of India (RBI) on Tuesday.

Market participants are largely expecting a minimum 25-basis point rise in policy rates. Also, it is possible the regulator may accept and implement most recommendations of the working group on the operating procedure of monetary policy, which will boost market sentiments.

“A hike of 25bps has been factored in by the markets but one cannot rule out a hike of 50bps due to inflation concerns. This could generate a reaction from the traders, who are not anticipating a higher hike,” said a treasury head with a public sector bank.

The wholesale price index rose in March to 8.98 per cent over last year, fuelling expectations of fierce action from the apex bank. The 10-year benchmark 7.8 per cent bond yield may move in the range of 8.1-8.15 per cent. It settled at 8.13 per cent last week.

Short-term rates are likely to stay high prior to the announcement, as banks may want to meet their regulatory requirements before the RBI raises rates on Tuesday. Also, more than planned government borrowings through cash management bills under Ways and Means Advances has created uncertainty on liquidity.

The government announced it would raise Rs 8,000 crore through auction of 91-day Treasury bills and Rs 3,000 crore through sale of 364-day Treasury bills on Wednesday. It was scheduled to auction only Rs 5,000 crore of 91-day Treasury bills and Rs 2,000 crore of 364-day Treasury bills this week.

It has already borrowed Rs 26,000 crore through auction of cash management bills to tide over a temporary mismatch in cash flows. According to the limits set by RBI, the government can further borrow up to Rs 33,000 crore in the period till June 30.