The Hindu Business Line : Bond prices rally by over a rupee

`The language of the policy is hawkish but as long as there is robust deposit growth and heavy demand for SLR securities in the near-term, bond yields would not harden'.

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Mumbai Jan. 31 Bond prices rallied by over a rupee with the RBI hiking the repo rate and leaving all other key policy rates unchanged. The Standard and Poor's upgrade of India's sovereign rating to `investment grade' also caused bond yields to ease by 8 basis points ahead of the Credit Policy review. Total traded volumes on the order matching system were Rs 4,545 crore (Rs 1,050 crore).

The 8.07 per cent-10 year-2017 paper opened at Rs 101.23 (7.89 per cent YTM) and closed at Rs 102.37 (7.72 per cent YTM), up from the previous close at Rs 101.14 (7.90 per cent YTM). The 7.59 per cent-9 year-2016 paper opened at Rs 98.14 (7.87 per cent YTM) and closed at Rs 99.11 (7.72 per cent YTM), against the previous close of Rs 97.97 (7.90 per cent YTM).

Bond Yields

Mr Nitin Jain, Head, Fixed Income, ICICI Securities, said the language of the policy was hawkish but as long as there was robust deposit growth and heavy demand for SLR securities in the near-term, bond yields would not harden.

"The 10-year yield is likely to harden to 8 per cent by March, if there is a crunch in liquidity and the RBI makes any move to hike the Cash Reserve Ratio or cutting SLR for banks," he added. Traders said that with Government spending accelerating in the last quarter and FII inflows continuing, the RBI could either increase CRR or hike the repo rate before the annual review to reduce liquidity in the system.

Tight Liquidity

Mr Mohan Shenoi, Group Head-Treasury, Kotak Mahindra Bank, said: "It now appears that the tight liquidity conditions may prolong much longer. This will put pressure on short-term yields and lead to inversion of G-Sec yield curve".

"Credit spreads for bank borrowings are also expected to rise gradually from 200 to 250 basis points. With the increased CRR, the base borrowing cost of banks will be around 11.50 per cent," he added. "

In its current review, the RBI has unequivocally stated it will take all appropriate measures to tame inflation, and that over the rest of the year, liquidity management will get top priority," said Ms Tarini Vaidya, Country Treasurer, Centurion Bank of Punjab.