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Prices of Government Securities (G-Secs) crashed on Wednesday, with their yields shooting up, as the Monetary Policy Committee (MPC) upped the policy repo rate and the Reserve Bank of India increased the cash reserve ratio.
In an off-cycle meeting, the MPC unanimously voted to up the policy repo rate by 40 basis points to 4.40 per cent from 4 per cent to stanch rising inflationary pressures. CRR was also increased by 50 basis points to 4.50 per cent from 4 per cent.
Price of the benchmark 10-year G-Sec (coupon rate: 6.54 per cent) sank about ₹1.74 to close at ₹94.25 (previous close: ₹ 95.985). Yield of this paper skyrocketed 26 basis points to close at 7.3783 per cent (7.1181 per cent).
Bond prices and yields are inversely co-related and move in opposite directions.
Abheek Barua, Chief Economist, HDFC Bank, said the bond yield curve is likely to shift up as markets price in more aggressive rate action by the RBI.
“While there could eventually be some value buying at the long-end of the curve – providing some comfort – for now we expect the “pricing-in” effect to dominate and push the 10-year yield to 7.5 per cent.
“The bond yield curve is also likely to see some flattening with the short end rising despite surplus liquidity as future rate hikes get priced-in in the near-term,” he said.
Rupee rises
Meanwhile, the rupee closed about 10 paise stronger due to the repo rate hike and dollar sales by banks on behalf of foreign investors wanting to invest in LIC’s IPO.
The Indian unit closed at 76.41 per dollar against the previous close of ₹76.51. In intraday trades, the rupee even touched intraday high of 76.28 but could not hold on to the gains as importers started buying dollars.
Abhishek Goenka , Founder CEO IFA Global, said: “The rupee has been broadly stronger on the (rate hike) news and corrected heavily but the sentiment for the rupee remains weak on account of inflationary concerns and oil prices.
“...Oil needs to be watched closely in the next few months, any drastic price increases will significantly impact our rate hike trajectory, balance of payments and foreigners interest towards Indian assets which is already in trouble lately.”
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