Bond markets had much to cheer about on Tuesday after RBI announced a 25 basis points rate hike in the key policy rates as also a purchase of select securities through open market operations (OMO) for an amount of Rs 12,000 crore. Starved for liquidity, the money market was happy to hear there will be no further rate hikes in the immediate future. The yield on the 10-year benchmark paper, the 7.80% bond, maturing in 2020, fell by almost 15 basis points from 8.12 % to 7.97% , after the announcement and ended the day?s session at 7.96%.
Jayesh Mehta, MD and Country Treasurer, Bank of America said, ?The bond markets took the rate hike well because if nothing dramatic happens worldwide, there will be no rate action for some time. However, we have supply of paper coming in every week so the rally willbe limited. The 10-year paper should trade at around 8%.? Manish Wadhawan, Head, Interest Rates, Global Markets, HSBC, said, ?The market had factored in a 25 basis points rate hike. We believe the 10-year bond should trade in the range of 7.9-8% in the near term. Should the RBI come up with a larger quantum of OMOs, liquidity will improve further.?
Added Mohan Shenoy, Head, Treasury, Kotak Mahindra Bank, ?The 10-year bond should trade at a yield of around 8%. However, clearly the sentiment in the bond market has improved since the OMOs, will mean infusion of liquidity. What?s more, the 10-year benchmark paper is among the securities that is eligible for the OMO. However, we will now have to see if these measures improve liquidity meaningfully.? The RBI, in its observations, noted that even though a liquidity deficit is consistent with an anti-inflation stance, excessive deficit can be disruptive to both financial markets and to credit growth in the banking system. ?To ensure that economic activity is not disrupted by liquidity constraints, the liquidity deficit needs to be contained within a reasonable limit,? the central bank noted. It was based on the current assessment of prevailing and evolving liquidity conditions, that the RBI decided to conduct OMO for an aggregate amount of Rs 12,000 crore.
Last week RBI allowed banks to maintain 24% of their net demand and time liabilities, in the form of government bonds for a short period of time, to help tide over the liquidity shortage. It has also opened special LAF (liquidity adjustment facility) windows for banks to borrow against gilts. Banks have been big borrowers from the RBI?s LAF windows since September 9, 2010.
The average daily net injection of liquidity through LAF was Rs 61,700 crore in October 2010 with a peak injection of Rs 1,28,685 crore on October 30, 2010.
Call rates ended the day at 6.35% as compared with 6.9% on Monday. Banks continued to raise money via certificates of deposits (CDs), volumes for which crossed the Rs 8,000 crore mark; three-month CDs were commanding yields of 7.85%, slightly lower than those on Monday. Companies too were mopping up short-term money through Commercial Paper (CPs), the market for which saw volumes cross Rs 6,000 crore, with yields on the three-month CPs touching 8.27%.