Repo Cut Set To Pump Up Trading

The government securities market got a shot in the arm with the Reserve Bank of India (RBI) announcing a repo rate cut by 50 basis points from 5 per cent to 4.5 per cent. This is expected to induce a rally in the prices of gilts, especially the short and medium-term papers.

This is because for quite some time now, the short-term rates have been ruling higher compared with the long term rates, thereby spawning a flat yield curve.

But with the repo rate cut, the short-term rates are likely to come down, thereby steepening the yield curve. In the process, the long-term yields will also realign but not to the extent of the short-term rates.

 

The cut has been announced following the good monsoon and low inflation, which are two crucial factors that determine interest rates in India.

The RBI has even decided to revise the GDP outlook on the back of adequate rains and forecasts of better crop yields.

The Rs 8,000 crore Centre state debt swap will be held on Monday and is expected to be subscribed to overwhelmingly. The bid size and amount of subscription are important indicators for the market.

Last week, there was heavy selling of gilts as players such as banks and mutual funds were shifting positions from long-term to short-term papers. This strategy was effected to bring down the impact of the interest rate risks on their portfolios.

Moreover, participants are also reshuffling their portfolios from a debt-skewed one to an equity-tilted one to take advantage of the returns.

Selling pressure was felt as there were no fresh triggers to invest in debt.

Moreover, internationally bond yields have been going up with the steepening of the curve. This resulted in some uncertainty locally on the interest rate outlook