Yield on the benchmark bond fell to 7.41% before closing at 7.44%, down 13 basis points from its previous close.
By Utsav Saxena
Bonds rallied on Thursday after the Reserve Bank of India (RBI) left the key policy rate untouched at 6.5% and confirmed to extend its open-market debt purchases until March. The yield on the benchmark bond fell to as low as 7.41% intra-day before closing at a seven-month low of 7.44%, down 13 basis points (bps) from the previous close of 7.58%.
The yield on bond fell to its lowest level since April, Bloomberg reported.
Earlier, the yield had spiked by four basis points after the central bank said that starting in the January-March quarter of 2019 it would begin to lower banks’ statutory liquidity ratios (SLRs) by 25 bps each quarter until it reaches 18% of deposits. The move is aimed to align the SLR and the liquidity coverage ratio. SLR currently stands at 19.5%.
However, the bond market was reassured after RBI deputy governor Viral Acharya said bond purchases via open market operations (OMOs) would continue and that long-term repo operations would be used alongside.
B Prasanna, head of Global Markets Group at ICICI Bank, said: “Going forward, we believe the MPC is likely to remain on a prolonged pause. This also gives us confidence that the scope for a cut in rates becomes possible if realised inflation in the next few months were to confirm or undershoot the revised path forecasted by the MPC. The roadmap for a gradual reduction in SLR will help to release resources for credit and will become meaningful in an environment of OMO purchases.”
Experts believe the SLR cut will negatively impact the bond market as the banks will have the option to sell more of their government securities amidst the relaxed guidelines but it will not be visible in the bond yield movement because of the active RBI measures to provide adequate liquidity for the money markets.
“The announcement of continued open market operations to inject liquidity would complement the impact of the recent decline in the US 10-year yield and some stabilisation in crude oil prices at a moderate level. We now expect the 10-year G-sec yield to trade in a band of 7.3-7.7% in the remainder of this quarter,” said Naresh Takkar, MD & Group CEO at Icra.
Money market experts said yields at the short end – across treasuries, commercial paper (CP) and certificates of deposits (CD) – declined 25-50 bps in November after increasing 20-25 bps in October.
Rupee rises 3 paise to 70.46
The rupee on Wednesday ticked higher by 3 paise to 70.46 against the US dollar on Wednesday amid weakness in the greenback and easing crude oil prices.
Forex traders said the rupee’s rise was supported by dollar-selling by exporters and banks. At the Interbank Foreign Exchange (forex) market, the rupee opened lower at 70.70 and lost further ground to hit a low of 70.75.
The local unit, however, pared the initial losses and finally ended the session at 70.46 to the US dollar, up 3 paise.
On Tuesday, the rupee had slipped 3 paise to close at 70.49 due to increased demand for the American currency from importers. Brent crude, the international benchmark, was trading 0.32% lower at $61.88 per barrel Wednesday.
Traders said the rupee came under pressure during the session following heavy selling in domestic equities amid foreign fund outflows.
“RBI has maintained status quo on policy rates in line with consensus expectations. To address liquidity issues, the SLR requirement would be gradually brought down to 18% from 19.5% currently.
“Bonds added to the rally and we expect the positive impact of the same to rub off on equities as the global cues turn benign,” said Gaurav Dua, Head of Research, Sharekhan by BNP Paribas.
(With inputs from Agencies)