The Hindu Business Line : Bond prices decline

THE bond market turned volatile with prices of securities falling by nearly a rupee and yields hardening by almost 15 basis points following a mark up in reverse repo rate by 25 basis points to 5 per cent by the RBI today.

The actively traded 8.07 per cent-7 year-2017 paper opened at Rs 105.07 (7.41 per cent YTM) ahead of the Annual Policy and fell to a low of Rs 103.60 (7.60 per cent YTM), after the announcement of the rate hike. It later recovered to close the day at Rs 104.10 (7.53 per cent YTM) against Rs 105.07 (7.41 per cent YTM) on Wednesday.

The 7.38 per cent-10 year-2015 benchmark paper opened at Rs 102 (7.10 per cent YTM) and closed at Rs 101 (7.24 per cent YTM) against Rs 101.95 (7.11 per cent YTM) on Wednesday.

The 7.5 per cent-29 year-2034 paper ended at Rs 97.25 (7.737 per cent YTM). On Wednesday, it closed at Rs 97.70 (7.697 per cent YTM).

Dealers said a hike in reverse repo at this juncture was unexpected since the Finance Minister had said earlier this month that interest rates would not harden.

Mr Satish Chandra, Head, Fixed Income, Centurion Bank Ltd, said: "The bond prices have now factored in the 25 basis points hike and will hover at the same levels, until the auction in the first week of May. This Rs 8,000 crore auction could further cause a rise in the yields as there will be a fear of over supply."

The general sentiment among dealers was that there would be buying interest in select papers. There was also a suggestion that the government could introduce floaters instead of dated papers.

Mr Sampat Kumar, Vice-President and Head Treasury, IndusInd Bank, said, "The introduction of the quarterly review instead of the mid-term review implies that the central bank wants to reign in inflation and monitor it closely. A quarterly review will give them more flexibility. If oil prices do not ease then one can expect a further quarter percent hike."

"With the emphasis on global factors, the global interest rate might put a pressure on the Indian interest rate," he added. The Federal Open Market Committee meeting on the May 3 is another concern that is looming large.

A dealer at a public sector bank said that the markets would be bearish and the hike in the reverse repo rate was a sign that interest rates would harden.

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