CRR cut pushes yields to 6-week high

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SummaryBond mkt expected RBI to take a cue from FM’s fiscal consolidation roadmap and cut repo rate, say dealers.

Government bond yields rose to hit a six-week high after traders cut their bond holdings, dissapointed by the absence of a policy rate cut and worried that a cut in cash reserve ratio will push back bond purchases by the Reserve Bank of India.

“After Monday's announcements by the finance minister on fiscal consolidation, everyone in the market expected a rate cut. I think the market got a bit too long and so there has been a cutback,” said Hitendra Dave, head of global markets India at HSBC Bank.

RBI kept its repo rate unchanged at 8%, but slashed CRR, which is the portion of deposits that banks have to keep with the RBI, to 4.25%.

Dealers said after the announcement of a fiscal consolidation roadmap by finance minister P Chidambaram on Monday, the bond market was expecting RBI to take a cue and cut the repo rate. “Analysts were also expecting both CRR and a repo rate cut and it is a big dissapointment for them,” said the chief dealer at a large public sector bank.

The 10-year benchmark 8.15%, 2022 bond yield rose to 8.18% after the policy announcement from 8.11% before the policy was released. Bond traders had build positions in early trade ahead of the policy expecting a rate cut on back of the finance minister's fiscal consolidation plan.

Chidambaram on Monday gave a five-year roadmap for fiscal consolidation and said the government would endeavour to contain the deficit for 2012-13 to 5.3% of gross domestic product.

“The 10-year bond yield will get into consolidation mode at 8.12-8.17% with March 2013 target at 8.02-7.97%,” said Moses Harding, head of asset liability management and research at IndusInd Bank.

Dave of HSBC expects the 10-year bond yields to trade in 8.15-8.20% band in coming months. “CRR cut is an anticipatory measure by RBI, which is good. But the 10-year yield will not go below 8% because the funding cost or the repo rate is still at 8.0%,” said Pradeep Madhav, managing director of STCI Primary Dealership. Madhav sees the 10-year bond to trade in 8.10-8.20% band until the next policy review.

Eye on OMO

Most bond traders feel the CRR cut will push back RBI's bond purchases under OMOs. Nevertheless, with credit growth expected to pick up, RBI will have to buy bonds and infuse more liquidity into the banking system, dealers said.

During October-March period, the government will borrow R2 lakh crore from the bond market. CRR

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