Yields rise as RBI springs status quo surprise

The yield on the benchmark government bond rose 7 bps on Tuesday to touch 7.73% in intraday trade after the RBI decided to keep the repo rate unchanged at 7.75% in its monetary policy review.

“The yields had gone down in anticipation of a rate cut today. Although the RBI has cut the Statuatory Liquidity Ratio (SLR) by 50 bps, it does not immediately have an impact on the market and yields are likely to settle around these levels,” said PK Gupta, DMD and CFO, State Bank of India.

According to bond market watchers, the market was expecting interest rates to be cut by 15-25 bps by March and this had led to a fall in yields a day ahead of the RBI policy.

“Due to the Coal India divestment, one section of the market was expecting a 25-bps rate cut. Since there was no cut, yields reversed to day before Friday’s levels,” said Jayesh Mehta, managing director, country treasurer and head of FICC, Bank of America-Merrill Lynch.

Government bond yields had dropped to 7.65% — the lowest level since mid-2013 — on Monday, ending 4 bps down from Friday’s 7.70%.

“The market had factored-in a rate cut this time also because of which the yields strengthened a bit after the status quo announcement. However, RBI’s stance was not a surprise and we are en route to an easing interest rate cycle. The bond yields must settle around 7.55-7.60% going ahead,” said NS Venkatesh, executive director-treasury, IDBI Bank.

On January 15, when a surprise repo rate cut of 25 bps was announced, bond yields had come down to 7.69% — a fall of 8 bps from the previous close. Currently, the yields are down 26 bps since the last monetary policy on December 2, 2014.

The RBI also stated that as a measure to incentivise long-term investors, it has decided, in consultation with government, to enable reinvestment of coupons in government securities even when the existing limits are fully utilised. Currently, the investment limit in government securities by foreign portfolio investors (FPIs), registered with the Sebi, is capped at $30 billion of which $5 billion is reserved for long-term investors, the release stated.

The RBI said it would closely watch the Union Budget before taking a stance on further cuts. However, falling crude prices and an expectation of further 75-bps rate cut during the calendar year are keeping the yields near the 7.70% mark, according to many bond market experts.