Gilts bullish ahead of monetary policy

The prices of government securities remained bullish since the market discounted a 25 basis point hike in the repo rate and unchanged cash reserve ratio in the monetary policy to be announced by the central bank. This led to buying demand, especially in the benchmark ten-year paper.

The bullish sentiment was further reinforced with the macroeconomic review of the Reserve Bank of India on the eve of its monetary policy review on Tuesday. In its review, the RBI has brought down its growth forecast to 7.9 per cent from the earlier 8.1 per cent.

Since the growth forecast is moderate, the market assumed that credit offtake will be modest and in turn investments in government securities will grow.

 

The prices of ten year benchmark 8.24 per cent 2018 rose by 20-30 paise and therefore the yields fell from 9.17 per cent last week to 9.07 per cent on Monday.

Barring the ten-year benchmark, there was not much trading interest in any other security and prices moved in a narrow range of 5-6 paise. According to a dealer, the market is awaiting cues from the monetary policy review on Tuesday.

The cash reserve ratio is the portion of total deposits garnered by banks over a fortnight and deposited with the RBI as a statutory obligation. Repo is the rate at which the RBI infuses liquidity into the system.

Liquidity: Better times
The liquidity tightness in the market has started moderating since banks have already covered most of the fund requirements for the reporting fortnight on Friday this week.

Cash reserve ratio is the portion of total deposits garnered by banks over a fortnight and deposited with the RBI as a statutory obligation. Out of the total funds to be maintained, a bank needs to have at least 70 per cent on any given day of the fortnight. The call rates at which the banks lend and borrow funds from each other in the interbank market fell below 9 per cent to close at 8.70 per cent on Tuesday.

Forex: Rupee weakens
Aggressive buying of dollars by oil importers forced the spot rupee to close at 42.54/55 after opening at 42.26/28 to a dollar. However, bullishness in the government securities market eased the pressure on rupee.