RBI hikes repo rate, Bond Street relieved

The Reserve Bank of India’s (RBI) 0.25% hike in repo rate to 6.50% came with a neutral stance which cooled the yields in the government securities market.

Government bond yields fell by 0.06%, closing at 7.70%. The neutral stance gave market the status quo may be prolonged. The yields are expected to come down further in the coming weeks as RBI gives further comfort on liquidity.

Naresh Takkar, managing director & group CEO, Icra, said, “The maintenance of the neutral stance cooled bond yields after the policy announcement, as the rate hike itself was already priced in. Looking ahead, we expect the 10 year G-Sec yield to trade in a range of 7.65-8% in the remainder of this quarter.”

“Greater clarity on MSPs, crude oil prices and other inflationary trends, fiscal risks and the central and state government borrowing programme for second half of FY2019 may emerge as triggers for a rise in bond yields. On the other hand, the announcements of additional open market operations (OMO) could help cap the G-Sec yields,” Takkar further said.

Some market participants also expected a 0.50% rise in the rates, so when there was just a 0.25% hike to 6.50% there was a sense of relief, a banker said.  RBI also gave comforts to the market on the liquidity.

RBI deputy governor Viral Acharya said, “RBI will continue to actively manage the system liquidity so as to achieve the monetary policy objective of aligning the overnight weighted average call rate with the policy rate while meeting economy’s demand for reserve money growth. Evolving liquidity conditions will determine our choice of specific instruments for transient and durable liquidity management.”

Abheek Barua, chief economist at HDFC Bank, said, “This means the supply side pressures in the second half of this year could be offset by OMOs, but it is unlikely that we will have any liquidity surplus. We expect OMO purchases to the tune of Rs 80,000 crore in 2018-19, including Rs 30,000 crore done so far.”

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“The bond market seems to have reacted in a positive way to the rate hike. This we believe is in response to the RBI’s commitment to keep the liquidity situation neutral instead of allowing the system to move into a large deficit,” Barua said.

Kunal Shah, CFA, fund manager - Debt, Kotak Mahindra Life Insurance said, “From the bond market perspective, a neutral hike is a positive development as it takes away uncertainties on terminal rate in the near term. Markets fear of tighter liquidity stance has also not materialised as RBI has committed to infuse liquidity when deficit is durable, in the near term. Near-term range for bonds appears to be 7.60-7.80%.”

Source: DNA Money