The bond markets held their own on Friday despite the Reserve Bank of India’s decision to hike the CRR 25 basis points more than expected. Yields remained virtually unchanged and after touching an intra-day high of 7.60%, the 10-year benchmark closed at 7.58%, just 3 basis points higher than the closing yield of 7.55% on Thursday. While yields are expected to move in the region of 7.5% and 7.6% for the short term, most treasurers are bracing for a hike over the medium term.
Ananth Narayan, MD, South Asia financial markets, Standard Chartered Bank, says there is a possibility of the 10-year yield touching 8% in the next six months. ?Today’s trading has been muted and yields have hardly moved. But as the CRR hike becomes effective, we could see some squeeze in the liquidity and demand for bonds of shorter tenure will increase. That will eventually result in the yields moving up,? says Narayan. He adds the yield curve, currently, is somewhat steep because there is a fairly large gap between the yields on one-year paper and 10-year paper.? While the one-year bond is trading at 4.75%, the 10-year paper is quoted at 7.55%.
With the Reserve Bank of India increasing the cash reserve ratio (CRR)–the proportion of net demand and time liabilities that banks are expected to maintain as cash with the central bank-by a good 75 basis points to 5.75%, around Rs 36,000 crore will be sucked out of the system, instead of Rs 25,000 crore, as expected earlier. However, the system continues to have excess liquidity of over Rs 70,000 crore, which should be more than sufficient for the short term.
J Moses Harding, head, global markets group, Indusind Bank, said: ?This move has stalled a rally that we might have otherwise seen had the CRR not been hiked 75 basis points. The 10-year paper might have traded below 7.5% and closer to 7.35%.
The hike in CRR, which is expected to suck out Rs 36,000 crore of excess liquidity from the system, is scheduled to take place in two stages. The first stage of an increase of 50 basis points will be effective the fortnight beginning February 13, 2010. The next stage of an increase of 25 basis points will come into effect from the fortnight beginning February 27, 2010. Dealers said that for the short term, the bond yields would remain range bound with the 10-year bond yield trading between 7.5-7.6% ahead of the Budget on February 26, which would be the next event closely watched by the market, as the borrowing programme would be outlined then.
?Today, there has been some impact on bond yields, however, not a significant one. We are keeping a close watch on the upcoming Budget, which would give a clearer indication in the movement of yields,? said Mohan Shenoy, group treasurer at Kotak Mahindra Bank. He feels the 10-year bond yields could touch a level as high as 8% in the next six months, if the government borrowing programme announced then is significantly high. ?We should see some flattening in the curve soon,? he added.
Keki Mistry, vice-chairman and CEO with HDFC Ltd, too noted that the CRR hike would result in the shorter end of the curve to go up by 10-15 basis points. ?The market had already factored in 50 bps rise in CRR. So, an additional 0.25% rise in CRR will probably take short-term rates by 10-15 basis points,? he said. Mistry is of the view that there is still immense liquidity in the system in the form of SLR and reverse repo and in mutual funds, but credit off-take is still to pick up. ?The liquidity quantum is so large that unless and until there is a significant pick-up in credit off-take, I don’t see interest rate in the system going up substantially,? he said.
