The Reserve Bank of India (RBI) raised the statutory liquidity ratio (SLR) by 100 bps to 25%, unwinding a cut made last November during the credit crisis, keeping all other key policy rates unchanged.
The 10-year benchmark bond yield, 6.9% bond maturing 2019 closed at 7.27%, after falling as low as 7.25% intra-day, and below Tuesdays close of 7.34%.
Bond market sentiment has turned fairly positive after the policy, said Anindya Das Gupta, head of treasury at Barclays Capital. The yield is down 14 basis points in the past two sessions.
Das Gupta also said that the SLR hike would increase demand from those banks that hold less than the mandated limit.
The market has been burdened with a record government borrowing programme of Rs 4.51 lakh crore for 2009-10 and the federal government plans to sell Rs 1.23 lakh crore of bonds in the second half of the fiscal year.
Meanwhile, rupee fell to a three-week low, pressured by shares falling for the third straight day and customary month-end dollar demand from refiners.
It ended at 47.34/35 per dollar, off a low of 47.38, its weakest since October 5 and almost 1% weaker than its previous close of 46.88/90.
Although no federal bond auction is scheduled for this week, the central bank will auction Rs 4,315 crore of state loans on Thursday. Call rates ended nearly flat on excess cash in the system, but volumes fell as most banks stepped up their borrowing on Tuesday, anticipating a rate hike in the central bank's policy review, traders said.