RBI raises cut-off

The Reserve Bank of India (RBI) on Thursday set the cut-off yield in government paper auction at levels much higher than expected by the market.

Some market men interpreted this as the first signal of a tightening in the domestic interest rate regime. The markets reacted negatively and prices of long-term paper fell by almost 70 to 80 paise from the day's high.

The yield on the benchmark 10-year paper closed the day at 5.85/86 per cent, after having fallen in early afternoon.

The RBI set the cut-off yield in the auction of Rs 2,000-crore, 24-year government bond 2028 at 6.70 per cent, and set a 19 basis point spread over the 364-day treasury bill yield for the Rs 6,000-crore floating rate bond 2015.

The market was expecting the yield for the 24-year paper to be 6.65 per cent and the spread on the 2015 floater to be nine bps over the T-bill yield.

Some market players interpret the RBI move as a possible signal to prepare the market for the impending tightening of interest rates.

Others, however, hold different views. Dealers see the floating rate bond as a hedging mechanism and with a higher spread over the 364-day T-bill on the cut-off, the RBI is hinting at a lower rate on this T-bill, which acts a benchmark for short-term interest rates.

With the RBI's action the positive glow in the markets after the 25-basis point Fed rate hike has almost vanished. Though in line with market expectations, the "measured hike" saw the spot rupee and government bond prices gaining ground during the day.

The spot rupee opened lower at 45.95/96 as against a close of 46.04/06 on Wednesday. The yield on 10-year benchmark 7.37 per cent 2014 came down to 5.77 per cent in the day, compared to yesterday's closing level of 5.84 per cent.