The rise in bond prices on Wednesday could also be attributed to the fact that some traders had feared a steeper rate hike than the 50-bps increase announced by the RBI. Bond yields fall when prices rise.
Yield on the 10-year benchmark 6.54 per cent 2032 paper fell to a low of 7.43 per cent, nine basis points lower than Tuesday’s close of 7.52 per cent.
Falling government bond yields lead to lower borrowing costs across the economy, while reducing stress on equity valuations.
While the theme in the bond market is still one of yields heading higher – given the view of more RBI rate hikes and the huge t borrowing programme announced by the government-the prevailing mood in the market was one of relief.
Traders who had bet on bond prices declining after the RBI’s policy statement rushed to square off those positions in the secondary market, thereby pushing up prices further.
“Over the last few days, the expectations had changed a bit. Some people were expecting more than 50 basis points also and the expectation of a CRR hike was also there,” Primary Dealership’s Managing Director and Chief Executive Officer Shailendra Jhingan told ET Markets.
“Plus, the positioning is also driving the rally. Maybe, the market was a bit short; and now after the event, people are covering. The theme doesn’t change; the pressure on yields continues broadly.
Over the near-term, however, dealers do not see yield on the 10-year paper dropping below the 7.37 per cent level.
Many aspects of Wednesday’s policy statement were along expected lines, with the market taking the RBI’s sharp increase in inflation projections in its stride.
Citing the impact of surging crude oil prices amid the Ukraine war, RBI Governor Shaktikanta Das said on Wednesday, that CPI inflation is seen at 6.7 per cent in the current financial year, with the price gauge not seen falling below the 6 per cent mark till Jan-March.
The MPC is mandate to keep headline retail inflation in a band of 2-6 per cent, with the medium-term target at 4 per cent.
As such, it is taken as a given that interest rates will head up further.
“We think that the first pause will happen on 6 per cent repo rate only. After that depending on how the global uncertainty resolves. Let’s say, FY24 average inflation is in the 5-5 per cent handle, then 6 per cent repo rate will be appropriate for that. We think that they’ll take it up till 6 per cent and then assess,” Jhingan said.
The tighter financial conditions notwithstanding, the bond market welcomed the fact that the central bank did not take fresh steps to mop up excess liquidity from the banking system.
In May, the RBI had hike the CRR by 50 basis points; a move that was estimated to take out close to Rs 1 lakh crore of liquidity from the banking system.
Granted the RBI is committed to bringing down surplus liquidity – currently close to Rs 4 lakh crore – in a phased manner, but for the moment, the decision to stay pat on CRR gave some solace to traders amid massive bond supply pressures.
In the current financial year, the government is scheduled to sell bonds worth a record-high Rs 14.3 lakh crores on a gross basis. Of this, around 20 per cent has been borrowed so far.
SHORT BONDS RALLY MORE
The status quo on the CRR spurred heavy buying in short-term securities, which are more sensitive to liquidity conditions.
Yield on the 4-year 5.76 per cent 2026 paper fell as much as 16 basis points as traders rushed to cover short bets in the paper, dealers said.
“Status quo on CRR was maintained which is also good news for short end of the yield curve and in line with graded normalisation of liquidity,”
AMC’s, Chief Investment Officer, Lakshmi Iyer said.
“For fixed income Investors, continue to stay at the mid-end of the yield curve on a risk reward basis.”
