Likelihood of repo rate hike pushes G-sec yields
Oct 15 2013
On Tuesday the benchmark 10-year bond maturing in 2023 ended at 8.66 per cent, 10 basis points higher than the previous day’s close. RBI governor Raghuram Rajan has emphasised that the primary mandate of the central bank is to tame inflation.
This is fueling speculation that RBI is likely to increase the repo rate, or the rate at which it lends money to banks, in the next monetary policy review on October 29.
The appetite for government paper was, however, strong. The auction of 91-day T-bills worth Rs 6,000 crore was fully subscribed with the cut- off at 8.90 per cent, implying a yield 8.90 per cent.
Ashish Parthasarthy, trading head of HDFC Bank, said, “Before the inflation numbers, one small part of the market had anticipated a repo rate hike. But after the inflation numbers came in higher than expected, a significant majority of the market participants expect a 25 basis point repo rate hike. The appetite for government bonds will be muted if yields rise.”
According to him, the rupee has also been depreciating but “it is certainly not in panic mode”. “Slight movements will happen but it is well under control,” said Parthasarthy.
The demand for dollars from oil companies put pressure on the rupee which ended at Rs 61.88 to the dollar, 33 paise lower than the previous day’s close. As speculation spread about a probable compromise on the US budget and the debt ceiling, the dollar was seen recovering.
India Ratings & Research (Ind-Ra) said in a release, “Despite the favourable impact of the monsoon, it is quite unlikely that overall inflation will decline sharply any time soon. Headline inflation, on a year-on-year basis, increased to 6.5 per cent in September from 6.1 per cent in August due to inflation in primary food products (18.4 per cent) and fuel and power (10.1 per cent). Even the consumer price index in September escalated to 9.84 per cent fr5om 9.54 per cent in August.”
Systemic liquidity continued to be in the deficit and the money market rates were stable. Banks borrowed Rs 40,061 crore from RBI’s repo window.