The mood in the money market turned a bit nervous on Friday ahead of the monetary policy announcement scheduled on Tuesday, with the 10-year benchmark yield hitting a one-month high at 7.69%.
With inflation raging, the market is clearly expecting an increase in key policy rates by the Reserve Bank of India (RBI). Says Ananth Narayan, MD & head of rates with Standard Chartered Bank, ?We are expecting a 25 basis points rise in the repo and the reverse repo rates because high inflation and growth, coupled with a high current account deficit, will lead RBI to take these steps.? Narayan feels bond yields would hover around 7.60-7.75% for the next few days. ?I don’t think there could be a major impact on the bond yields as most of it has already been priced in,? he adds.
Moses Harding, head (global markets), IndusInd Bank expects the bond market to stay in a tight range till July 27, 2010.
?For now, we are expecting the bond yields to trade at 7.60-7.75% levels but we will have to wait for the RBI move to set the break-out direction,? he observes.
Wholesale price inflation touched 10.6% from a year earlier in June, following a 10.2% gain in May. An increase of 11.2% in April was the biggest since September 2008. The central bank raised interest rates for the third time this year on July 2.
Adds Rupa Rege Nitsure, chief economist at Bank of Baroda, ?I expect the central bank to raise the policy rates by a good 50 basis points in the monetary policy. Baby steps taken by the RBI have proved to be insufficient and hence an aggressive action by the RBI is the need of the hour.?
However, the RBI is unlikely to clamp down on liquidity with banks continuing to access the special borrowing window. On Friday, banks borrowed Rs 68,180 crore from the central bank’s repo window.
?Liquidity is under pressure and we expect this to continue next month as well,? said Nirav Dalal, MD & head (debt markets), YES Bank.
Funds close to Rs 30,000 crore have moved out of the banking system by June 15 towards the first installment of corporate advance tax. At the same time, telecom companies have paid the government Rs 67,700 crore for 3G spectrum, most of which is funded by banks. Another Rs 35,000 crore has also moved out for the wireless broadband spectrum sale.
However, Joydeep Sen, senior vice-president, advisory, fixed income at BNP Paribas India Wealth Management, believes the liquidity condition will somewhat improve, thanks to the maturity of gilts of Rs 30,235 crore on 28 July.
?Government expenditure, over a period of time, would also bring in additional liquidity. Thus, we can expect yields on money market instruments and shorter maturity bonds to ease as the scenario improves,? says Sen. He is of the view that the market would expect a lower quantum of government borrowing than that announced in the Union Budget, due to the success of the 3G and BWA auction.