Bonds dipped slightly on Thursday immediately after the Reserve Bank of India (RBI) increased the key policy rate by 25 basis points in line with market expectations. The yield on the 10-year benchmark bond rose to 8.37%, from 8. 33% before the announcement. While they rallied somewhat subsequently with yields coming off to 8.30% levels, with dealers attributing the move to an overnight rally in the benchmark US treasury bonds as also and a drop in crude oil prices, the mood remains circumspect.
Said Moses Harding, head global markets, IndusInd Bank, ?RBI did not choose to surprise the market and delivered the 25 basis points rate hike. However, it has not ruled out more rate hikes ahead if headline WPI continues to stay at elevated levels.?
Observed Parthasarathi Mukherjee, president treasury, Axis Bank. ?Given to the high inflation number of 9.1% for May, the bond market continues to remain bearish as there is more room for further rate hikes.?
Mukherjee added, ?Today’s rally in bonds is temporary, the market is actually in a bearish zone.?
Added ADM Chavli, treasury, Bank of Baroda. ?The markets are witnessing a relief rally since the outcome of the policy meeting was in line with expectations, who pointed out that liquidity is not a concern at the moment since the excess SLR in the system is to the tune of R1.8 lakh crore.
Indusind Bank?s Harding added that the RBI?s stance would be to ensure that bond prices remained stable with the yield on the benchmark likely to consolidate at 8.30-8.40% but with an upward bias into 8.45%. ?The major impact will be at the shorter end of the rate curve where 9-12 month interest rates will have upward shift by 25 basis points, making money more expensive.?
Indeed, treasurers are not expecting any meaningful movement from the current levels. Said Pawan Bajaj, DGM, Treasury, Bank of India, ?We expect yields could remain between 8.4% and 8.5% as the comments made by RBI were hawkish indicating another hike in six weeks time.? Bajaj added, ?The key triggers to watch out for will be inflation and US Federal Bank’s meeting on June 21 and 22.?
Meanwhile, the overnight indexed swaps (OIS) rates also dropped sharply on Thursday. The benchmark five-year swap rate was down 17 basis points at 7.73%, while the one-year rate came off 6 basis points from its highs to 7.74%.
Banks scrambled to borrow overnight money in anticipation of a 25 basis point increase, in the policy rate, since Friday would be the last day of the reporting fortnight. They picked up R84,775 crore from RBI’s liquidity adjustment facility, highest amount since May 26, 2011.