The Hindu Business Line : Securities bearish; rupee declines

MUMBAI: The hike in the reverse repo rate and repo rate took the bond market by surprise and there was a 60-paise fall in the 10-year benchmark security.

The 10-year yield, which is currently at 7.21/7.22 per cent, is expected to harden further by the end of the fiscal, said dealers. The 10-year yield is currently derived by averaging the yields of the 8.07 per cent - 2017 paper and the 7.37 per cent - 2015 paper.

The 8.07 per cent - 11 year-2017 paper opened at Rs 106.54 (7.20 per cent yield to maturity) and closed at Rs 106.635 (7.31 per cent YTM). The 9.39-5 year-2011 paper opened at Rs 112 (6.72 per cent YTM) and ended at Rs 111.40 (6.84 per cent YTM), down from Monday's Rs 111.97 (6.72 per cent YTM).

Dealers said the market, which had not expected a rate hike and had, in fact, anticipated a cut in the cash reserve ratio, was taken by surprise. Dealers who had been holding their positions until the review of the credit policy were selling in the market on Tuesday.

Mr Ajay Mahajan, Group President, Financial Markets and Private Banking, Yes Bank, said that with the tightening of the interest rate cycle, there could be pressure on the bond market. "Primary dealers could now be risk-averse and buy in the market only during the auctions. The 10-year yield might end the fiscal at 7.25 per cent."

Dealers said the outlook for the bond market could be bearish in the next fiscal as well. "Next fiscal, higher Government borrowings and lack of participation by primary dealers could further pressurise yields. The ten-year yield could harden to 7.75-8 per cent by the end of this calendar year," said Mr Mahajan.

However, other dealers said that the 10-year yield could be range-bound by 15 basis points. Mr J. Moses Harding, Executive Vice-President, IndusInd Bank, said that the 10-year yield could harden to 7.25 per cent.

"The 10-year yield of 7.25 per cent would make an investment opportunity in the held to maturity category and a risk-reward investment in the case of the allowed for sale category for banks," he said.

The rupee slightly depreciated against the dollar on account of oil related demand.

The domestic currency opened at 44.22/23 and touched an intra-day high of 44.16. It closed the day at 44.26/27, lower than Monday's 44.21.

The forward market saw a rise in premia, as a hike in the short-term rates implied tighter liquidity. This in turn would make the rupee scarce, said dealers.

The 6-month premium closed at 2.3 per cent (1.96 per cent) and the 12-month premium ended at 1.82 per cent (1.52 per cent).

The call rate closed at 7.25-50 per cent (7). In the first one-day reverse-repo, the RBI received one bid for Rs 40 crore and 32 bids for Rs 15,170 crore in the repo auction.

In the second one-day reverse-repo auction, the RBI received two bids for Rs 310 crore and 13 bids for Rs 4,145 crore in the repo auction. In the CBLO market, there were 324 trades for Rs 14,556.3 crore in the rate range of 6.28-6.50 per cent.