Just before the ReserveBank of India announced a sharp 50 basis points increase in the cash reserve ratio (CRR) and a 50 basis points in the repo rate, bond yields had moved away from their seven-year highs struck in the previous session, on hopes the central bank may tighten rates gradually to contain double-digit inflation.
The 10-year benchmark bond yield ended at 8.57%, off an intraday low of 8.54% but down from Monday’s close of 8.64%.
Reserve Bank of India, Governor, Yaga Venugopal Reddy signaled on Monday the bank would tighten policy to fight inflation, but calmed bond market expectations that an aggressive interest rate rise was imminent.
Traders expect the 10-year bond yield to hover around current levels in the coming days, with resistance expected at 8.55%. “The rest of the curve is not behaving the same. The 10- year has been erratic,” a senior trader with a foreign bank said.
The yield on the short-end twoyear bond, maturing in 2010, ended at 8.62%, above the 10-year yield.
The central bank had earlier this month raised its key lending rate by 25 basis points to 8%, which was its first rate increase since March 2007.
For the past year, the RBI had been mostly using the-CRR, the proportion of deposits that banks must set aside, as a tool to absorb excess inflation-stoking cash from the system and keep price pressures in check. The CRR is now at 8.25%, up 75 basis points in 2008.
Meanwhile, rupee shed early gains to close flat on Tuesday, holding just above 43 per dollar, with selling pressure from weaker local stocks and high oil prices balanced by expectations of central bank support. It ended at 42.9625/9700 per dollar, off an early high of 42.9250, and virtually unchanged from its previous close of 42.9650/9750. “The rupee was range bound today, the central bank fears continue to grip the market,” a chief dealer with a cooperative bank said. The central bank was suspected to have intervened to buy rupees when it touched a 13-month low of 43.21 per dollar in late May. Dealers say it seems determined to keep the currency stronger than 43 per dollar, although they said there was no sign of it intervening on Tuesday.
The benchmark 30-share index dipped below 14,000 points for the first time in 10months on Tuesday as political uncertainty and expectations for an interest rate increase kept investors on edge. So far in 2008, foreign funds have sold a net $6.1 billion of Indian shares, more than a third of what they pumped in last year, helping push the rupee down 8.3%. The rupee rose more than 12% in 2007. Oil rose for a third straight session on Tuesday and was trading close to $138 a barrel. One-month offshore non-deliverable forward contracts were quoting at 43.27/37, weaker than the onshore rate.