RBI monetary policy review: Bond yields up as RBI holds rates

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Published: February 3, 2016 1:03:35 AM

The 7.72% yields from ten-year benchmark government bond rose to their highest level since August 2015 with the Reserve Bank of India (RBI) deciding to keep the repo rate unchanged at 6.75% in Tuesday's monetary policy review.

The 7.72% yields from ten-year benchmark government bond rose to their highest level since August 2015 with the Reserve Bank of India (RBI) deciding to keep the repo rate unchanged at 6.75% in Tuesday’s monetary policy review.

The yields rose six basis points from Monday’s close to end at 7.85%. The new 7.59% benchmark bond yields also rose to their highest level at 7.72% since it was introduced.

Meanwhile, the government on Tuesday announced a repurchase of three short-term government stocks worth R20,000 crore using their surplus cash balance. This step is believed to impart some sort of soothing effect on the yields, market players said. As on February 1, government’s surplus cash balance stood at R1.23 lakh crore.

Last year, the government did a ‘Switch’ where in they bought the short-term bonds and sold long-dated securities. Considering that no sale of securities have been announced, the addition of R20,000 crore into the system might lead to some softening in yields, according to market experts.

As far as Tuesday’s yield movement is concerned, multiple factors like uncertainty over future rate cuts till further clarity on inflation trajectory, RBI’s stance on liquidity easing measures, and the central bank’s comfort with the current G-sec yields lead to a rise in yields, according to market participants.

Ajay Mangulunia, executive vice-president at Edelweiss Securities pointed out that a portion of the market was expecting a rate cut which did not happen.

“What really caused the yields to go up is the fact that future rate cuts might be doubtful considering that the RBI is waiting for further data points from the forthcoming Budget to decide on the inflation trajectory. Moreover, there was some lack of clarity in the policy statement as far as the liquidity easing measures or Open Market Operations by the RBI was concerned,” he said.

Rajan said in the post-policy press conference that G-sec yields are not just about policy but also about other factors as well. “Obviously, expectations of inflation do come in and I believe expectations have fallen over time. But other aspects also have an influence. For instance, clearly the supply demand for the G-secs at a particular point in time does have some affect. To that extent, issues of liquidity, issues of available purchasing institutions etc. do matter,” he added.

Vijay Sharma, senior executive vice-president at PNB Gilts, said the policy was a bit more hawkish than what the market was expecting.

“A small section of market was expecting a rate cut whilst a large section was expecting concrete measures or intent to handle liquidity situation. None of this was delivered. On the contrary, RBI seemed unperturbed at current liquidity situation as well as at the current long bond yields. This further unnerved the market which is already grappling with a severe demand supply mismatch,” Sharma said.

State development loans close to R60,000 crore is set to hit the market over the next two months. With such a supply coming in and a potential supply of discom bonds looming large, G-sec yields are coming under pressure, according to bond market experts.

Northbound

The 7.72% yields from ten-year benchmark bond rose to their highest level since Aug 2015.

The new 7.59% benchmark bond yields also rose to their highest level at 7.72%.

Govt announces repurchase of three short-term government stocks worth R20,000 crore.

As on February 1, government’s surplus cash balance stood at R1.23 lakh crore

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