Following the Reserve Bank of India?s (RBI) decision to raise the repo, reverse repo and cash reserve ratio by a good 25 basis points each, bonds gained the most in three weeks. The rupee too climbed as the policy was in line with expectations from the market.
The 10-year benchmark paper, 6.35% bond maturing 2020 fell by 10 basis points to close at 7.98% on Tuesday. At the same time, the rupee strengthened by 0.5% to 44.51 against the dollar. It had touched 44.1650 on April 15, the highest level since September 2008.
?Bonds have rallied a little as the bond market had already factored the rise of a 25 basis points in the interest rates. I expect the bond yield to peak out at 8.25% in the next two months,? said Jayesh Mehta, MD & country treasurer at Bank of America.
Overseas investors have bought a net of Rs 3.64 billion of Indian stocks on April 16, taking total purchases this year to Rs 260.7 billion, according to the market regulator.
D Subbarao, governor at RBI has said that managing the government borrowing programme is going to be more challenging than in last year as the liquidity management through OMO and MSS which we used extensively last year will be limited this year, private credit demand will pick up, making crowding out a potential possibility and inflation pressures are stronger.
However, the central bank will ensure that credit requirement of both the government and the private sector is met.
The Budget has begun the process of fiscal consolidation and the net market borrowing requirement of the Central Government in 2010-11 is budgeted lower than that in the previous year. However, fresh issuance of securities in 2010-11 will be 36% higher than last year, he added.
The governor has also cautioned that the continued accommodative monetary policy in advanced economies is expected to trigger large capital flows into emerging economies like India which will pose a challenge for exchange rate and monetary management.