The Hindu Business Line : Bond prices rally; market sees more tightening

Bond prices rallied by about 75 paise (yields came down by around 10 basis points) as the RBI kept the short-term interest rates (reverse-repo, repo and cash reserve ratio) unchanged. However, market players expect further monetary tightening from the central bank as it has revised its inflation target to 5 per cent and further down to 4-4.5 per cent in the medium term.

"The rally in the bond prices was on account of unchanged short-term interest rates by the RBI. However, one has to see how long the rally actually sustains because the future statement from the RBI looks hawkish as it seeks to contain the inflation from its existing target of 5-5.5 per cent to 4-4.5 per cent. The monetary tightening has certainly not yet stopped," said Mr J. Moses Harding, Head-Wholesale Banking, IndusInd Bank.

Though the bond prices rallied after the RBI's annual credit policy, increase in the MSS amount brought about a correction of 15-20 paise in the bond prices during the day.

MSS ceiling

In an MoU,the Government of India and the Reserve Bank of India have revised the ceiling for the outstandings under the MSS to Rs 95,000 crore with a threshold of Rs 85,000 crore at which the ceiling will be reviewed in future, said a statement by RBI.

In March 2007, the MSS ceiling was fixed at Rs 80,000 crore, with a threshold level for review of the ceiling at Rs 70,000 crore. The MSS outstandings currently stand at Rs 75,521 crore.

"The money supply and credit growth targets for 2007-08, as indicated by the RBI at 17-17.5 per cent and 24-25 per cent respectively, is lower than the current levels. This leads to expectations of more monetary tightening in the days ahead, even as the RBI decided to temporarily pause on Tuesday to take stock of the impact on the real sector of the earlier tightening.

Changes in interest rates and CRR are not necessarily undertaken on the day of credit policy meetings and monetary policy changes, in a sense, are now more proactive to the requirements of the hour," said Mr Mohan Shenoi, Group Head-Treasury, Kotak Mahindra Bank The 8.07 per cent-10 year-2017 paper opened at Rs 99.75 (8.11 per cent YTM) and closed at Rs 100.52 (7.99 per cent YTM) against Rs 99.76 per cent (8.10 per cent YTM) on Monday. The 7.38 per cent-8 year 2015 paper opened at Rs 95.44 (8.14 per cent YTM) and closed at Rs 96.23 (8 per cent YTM) against Monday's close of Rs 95.41 (8.15 per cent YTM).

Call rates lower

Call rates ruled at 8-8.25 per cent against previous close of 9-9.25 per cent.

In the first one-day reverse repo auction under LAF, the Reserve Bank of India received and accepted three bids for Rs 125 crore and in the first one-day repo auction, the RBI received and accepted 23 bids for Rs 14, 365 crore. In the second one-day reverse repo auction, the RBI received five bids for Rs 1,615 crore and accepted five bids for Rs 1,000 crore. In the second one day repo auction, the RBI received and accepted two bids for Rs 40 crore.

"The bond markets are likely to be cheerful for the next few weeks. While strong deposit growth will necessitate SLR buying by banks across the board, the impending CRR hike (April 28), fresh supply from the Government and the spectre of a potential cut in SLR will keep the lid on bond prices, said Mr Ajay Mahajan, Head-Financial Institutions and Markets, Yes Bank.

Reserve Bank of India has also said that widening of the repo market to include corporate bonds will be considered after the proposed trading platforms stabilise and robust clearing and settlement systems (delivery versus payment system) are established.

The High Level Expert Committee on Corporate Bonds and Securitisation (Chairman, Dr R.H. Patil) had recommended, inter alia, the establishment of a trade reporting platform for better price discovery. The reporting platforms for corporate bonds have already been established by stock exchanges as per the SEBI guidelines.

The FIMMDA is also in the process of setting up a reporting platform for over-the-counter (OTC) trades in corporate bonds and providing a consolidated ticker service for reporting all trades in corporate bonds. - Our Bureau

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