The Hindu Business Line : Repo rate hike in the offing

Bankers are anticipating the repo rate hike, well before the peak season credit policy. The repurchase operations or repo is the rate at which the Reserve bank of India, removes liquidity from the market, through placement of securities. The repo hike expectations come in the wake of the fixing of high cut off yield on Wednesday's T-bill auctionsat 5 per cent.

Further the high yield to maturity fixation for the 30-year G-sec auction at 7.5 per cent was also seen as a signal for possible hikes in the repo rate. Most bankers were expecting the yield to maturity to be fixed at only around 7 per cent, in line with the prevailing yield curve. Besides, bankers said that the possibilities of hikes were also evident from the low responses to the floating rate offer and the T-bills auction.

The 11-year floater devolved partly on the RBI. In the case of the 91 day T-bill, as against the targeted amount, of Rs 2,000 crore, the competitive bids received were just Rs 1,163 crore. Of this, only Rs 750 crore was accepted. Another Rs 380 crore of the non-competitive bid was accepted, which was still way short of the targeted amount.

Internationally rates have been on the ascent. The Fed funds rate has also been raised for the second time in two months and is now at 1.5 per cent. But at the last hike by the Fed, the RBI had not responded.

The Bank of England has already hiked its rates. As a result, the Bank of England's repo rate was higher than the RBI's equivalent rate by at least 25 basis points (0.25 per cent).

However, there was no competitive pressure on the RBI to hike the repo rate, since India has not yet entered the regime of fully capital account convertibility.

Unlike in the US and the UK, the real yields here are negative across most categories of securities. In the US and the UK, yields on Government securities were positive by anywhere between 150 and 200 basis points. But in the domestic markets, yields were negative by at least 100 basis points up to 10 years.

In anticipation of this kind of a hike, yields on securities have already begun hardening. One-year securities have moved up wards of 5 per cent. The ten-year yield to maturity on the benchmark 7.37 per cent 2014 security was 6.7 per cent.

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