The Reserve Bank of India (RBI) on Friday raised policy rate by 25 basis points, in line with its anti-inflationary stance. The central bank also said a change in stance would depend on the downward trajectory of inflation in the future. As a result, market participants sense a possibility of further rate rises, in contrast to earlier expectations of a pause from October.
Yields on the 10-year benchmark 7.80 per cent government bonds closed three basis points higher at 8.36 per cent on Friday, compared with yesterday’s close of 8.33 per cent. “Markets had already priced in the rate rise and, hence, did not react much,” said a treasury official of a Chennai-based public sector bank. The lack of fresh supply from bond auctions kept the yields from hardening further.
The impact on short-term interest rates was more pronounced, since the interbank call money rate moved rose to adjust to the repo rate, which is 8.25 per cent. Overnight indexed swap rates rose by 10-12 basis points, as traders expect the monetary tightening cycle to continue. The liquidity scenario worsened, as banks borrowed more than Rs 1 lakh crore from RBI before the policy announcement on Friday.
RBI said so far, the liquidity deficit, with daily average borrowing at around Rs 40,000 crore, had been consistent with the monetary policy stance, while the money and the government securities markets remained orderly.
Going forward, market participants expect yields to remain at the current levels. “The market impact would be neutral at this stage. Call money, at 8.25 per cent till December and at 7.25 per cent thereafter, may not impact money market rates beyond three-month tenors. Yields on 10-year bonds, at 8.25-8.40 per cent, would remain steady and in a consolidation mode,” said Moses Harding, head (global markets group), IndusInd Bank.
“This rate rise was priced in, but going forward, a lot would depend on how inflation pans out. The impact of past rate increases should be seen in the second half,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.
The government borrowing calendar for the second half of the current financial year is yet to be announced. Of the planned gross borrowing of Rs 4.17 lakh crore in 2011-12, the government had borrowed Rs 2.28 lakh crore till September 2. “Unless the government surprises the market in terms of its borrowing calendar, it is unlikely that the benchmark ten-year government security yield will decisively cross its previous peak of 8.50 per cent,” said economists at Standard Chartered Bank.
