The Hindu Business Line : Bonds rally despite surge in inflation

CONTRARY to expectations that the domestic debt market would tank following the inflation rate surging to a four-year high at 8.17 per cent, bond prices rallied by over one rupee across maturities leading to a softening in the yields of many papers.

The 10-year benchmark paper, the 7.37 per cent 2014 soared to Rs 110.90 after opening at Rs 110.80/85 levels.

The yield on this paper came down to 5.88 per cent from 6.02 per cent earlier.

Following its lead, the eleven-year actively traded paper, the 7.38 per cent 2018 also closed over a rupee higher at Rs 111 at a yield of 6.01 per cent.

Another very popular security, the 8.07 per cent 2017 ended 80 paise higher, closing at Rs 113.90 (6.43 per cent YTM). Dealers said there was buying interest in papers across maturities.

Analysts are of the view, that some market participants, mainly banks, were deliberately "pushing up" the market today so that they will have to take a smaller hit when they transfer their SLR securities to the Held to Maturity (HTM) category, as was permitted by the Reserve Bank of India on Thursday.

While transferring securities to the HTM category will give banks some cushion against hardening yields, they would also have to take a one-time hit, as the costs of shifting would have to be at the market price, which is lower than their holding price of the securities.

Therefore, "artificial" buying interest was generated in the market pushing up bond prices and bringing down yields, which would soften the blow for banks, in terms of their transfer costs, reasoned analysts.

However, some bankers disagreed with the contention that the market is being artificially propped up for this purpose.

"No one can push up markets and expect the prices to sustain as a market is made up of both buyers and sellers. If I find the prices unreasonable I will sell, regardless of someone pushing up the market," said a treasury head of a leading bank in the country.

Bond prices may be going up as one part of the market has formed a view that inflation may have "peaked" at 8.17 per cent and is likely to come down from here on.

Added to this, the RBI's leeway to banks with regards to the classification of their securities portfolio has bolstered sentiment, he said.

Meanwhile, in the seven-day repo under LAF, the RBI received and accepted 8 bids amounting to Rs 945 crore and 49 bids amounting to Rs 28,430 crore, both at the rate of 4.50 per cent.

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