After witnessing a drastic fall in bond prices over the past one month, the bond market finally had some reason to cheer. Following the Reserve Bank of India?s decision during the monetary policy on Tuesday, bond yields dropped 20 basis points from an intra-day high of 8.14% to 7.94% on Tuesday.
Market players who expected an increase in interest rates during the monetary policy were quite thrilled as the apex bank left interest rates unchanged in its policy review, instead raised banks’ reserve requirement to tame inflation.
?There was a high expectation of a repo rate hike. When the central bank left interest rates unchanged it led to a fall in bond yields. There was also some short covering of positions witnessed in the bond market,? said Ajay Mahajan, group president of financial markets at YES Bank. The reaction in the bond market after the policy announcement was fairly positive.
Pankaj Tibrewal, fund manager at Principal Pnb Asset Management said the rally has been mainly been on account of covering of trading position by market participants. ?The medium and longer end corporate assets could also witness rally in line with government securities. However, the shorter end of the yield could be range bound as we expect liquidity to moderate going forward once all the CRR hikes come in effect,? he said. Tibrewal feels the 10-year g-sec will be capped at 7.95% – 8.00% as inflation concerns, auction supply in coming days will take over market positions. Volumes were also heavy at Rs 102.65 billion on the central bank’s trading platform.
NS Venkatesh, MD &CEO, IDBI Gilts is of the view that next week bond yields may touch 7.93% and thereafter, it all would depend on how inflation numbers pan out. ?However, there is an expectation that monetary measures might be taken in future. More CRR hikes and MSS sterilisations are expected,? he added.
The RBI made it clear that there would be an active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants.