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The price of government securities (G-Secs) crashed on Friday as the monetary policy committee (MPC) upped the policy repo rate by 50 basis points to 5.40 per cent.
However, the rupee appreciated as the rate hike is seen stemming portfolio outflows from the equity and debt markets to an extent.
The price of the 10-year benchmark G-Sec (coupon rate: 6.54 per cent) slumped about 97 paise to close at ₹94.84 (previous close: ₹95.8125). The yield of this paper jumped about 15 basis points to close at 7.3051 per cent (7.1566 per cent).
RK Gurumurthy, Head-Treasury, Dhanlaxmi Bank, observed that bonds had rallied in the last few days on hopes that the rate hike may perhaps be smaller and the policy stance dovish, after the recent drop in international crude prices and US GDP data, which suggested higher prospects of economic recession.
“Indian bond yields had somewhat of an overdone and extended rally, and today’s policy decision has helped correct that overt optimism. The broader message is that it is too early to call an impending pause and there are far too many moving parts that may come into play as we go forward,” he said.
Bond market traders said about 50 per cent of the market was expecting the RBI to up the repo rate only by 25-35 basis points as retail inflation appeared to have peaked and commodity prices were softening. But a hawkish policy announcement triggered a wave of selling.
Prior to the policy announcement, the 10-year paper was trading at a yield of around 7.11 per cent. But after the policy announcement, the yield jumped to 7.25 per cent. This prompted market players to bid the 10-year paper at a higher yield (7.30-7.35 per cent) at the weekly auction.
The RBI accepted bids for the aforementioned paper at 7.3328 per cent (price: ₹94.66).
Rupee bounces back
The rupee appreciated about 23 paise to close at 79.235 per dollar against the previous close of 79.47 in the backdrop of the repo rate hike and portfolio inflows.
“The depreciation of the Indian rupee is more on account of the appreciation of US dollar rather than weakness in macroeconomic fundamentals of the Indian economy. Market interventions by the RBI have helped in containing volatility and ensuring orderly movement of the rupee. We remain watchful and focused on maintaining stability of the Indian rupee,” RBI Governor said.
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