The Hindu Business Line : Bonds tumble as market presses panic button

Advertisement

Mumbai Feb. 13 Bond prices tumbled by around 85 paise during the day reacting to statements made by the Reserve Bank of India Deputy Governor, Dr Rakesh Mohan, on inflation being a concern. The 8.07-10 year-2017 benchmark paper shed around 85 paise and treasury officials expect the yields to inch up further by 10 basis points.

After market hours, the RBI announced a hike in the Cash Reserve Ratio from 5.50 per cent to 6 per cent (in two phases). CRR is a portion of bank deposits maintained withheld by the RBI for free.

Speaking at the sidelines of a conference, Dr Mohan said the central bank would react swiftly and use all policy tools to rein in inflation. "The firming up of inflation bothers us," said the Deputy Governor.

Market participants pushed the panic button and began heavily selling in the bond market. "The fact that Dr Mohan has been reiterating his concern on inflation shows that the central bank may act sooner rather than later," said a dealer at a private bank.

Bond dealers have been speculating about hike in CRR since last week and fresh statements from the central bank on Monday only reaffirmed the view. Market participants have also been nervous since there have been no repo bids under RBI's Liquidity Adjustment Facility Liquidity in the past few days, signifying an excess of cash in the system.

The central bank had in its quarterly review of the monetary policy on January 31 maintained that its focus would be on liquidity management.

Pruning positions

Since the Rs 9,000 crore government securities auction had just concluded on February 9, dealers began severely pruning their positions.

The 8.07-10 year-2017 paper opened at Rs 101.50 (7.85 per cent YTM) and closed at Rs 100.75 (7.96 per cent YTM), down from Monday's close at Rs 101.60 (7.83 per cent YTM).

The 7.37 per cent-7 year-2014 paper opened at Rs 97.30 (7.87 per cent YTM) and closed at Rs 96.85 (7.95 per cent YTM), against Monday's Rs 97.38 (7.85 per cent YTM). Total traded volumes on the order matching system were at Rs 2,290 crore (Rs 1,640 crore)

Mr Nitin Jain, Head, Fixed Income, ICICI Securities, said the government security yields could inch by 10 basis points and the 10-year paper could see a yield of above 8 per cent on Tuesday. "A CRR hike will tighten the liquidity in the system and will put deposit and lending rates under pressure. This will mop up and sterilise the excess liquidity being stoked up in the system due to sustained capital inflows and the RBI's intervention in the bond market," Mr Jain said.

More Stories on : Debt Market | CRR & Bank Rates | Economy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page