Benchmark yield may trade in 8.10-8.25 range

Bonds saw some easing of yields from their peak once the auction calendar was completed and it appeared that there would be no further auctions. Low IIP numbers also contributed, but the effect was somewhat negated by inflation numbers remaining on the higher side and US yields spiking. The market is now witnessing see-saw yields largely based on news items such as inflation, continuing liquidity tightness, and deliberations on future rate actions by the RBI.

The shorter end of the curve (up to six years) remains skittish on continued uncertainty on rate hike – the market feels that another 75-100 bps hike is required while economic numbers show a mixed bag. Friday’s price action seems to reflect some profit booking and a surprising concern on the new CPI data.

The benchmark 8.08 2022 is likely to trade in a range of 8.10 and 8.25. Weekly WPI numbers are not expected to provide any major respite.

CDs continue to be issued in the 10%-plus range for a year with the curve pretty much flat beyond March 2011. Banks will continue to use the CD market to raise funds whereas CP issuances will be lacklustre due to high rates. Call money will play the wider 6.50-7.00 range with greater activity concentrated in the 6.75-6.85 segment due to tight liquidity. Negative liquidity in the system continues to be in excess of Rs 80,000 crore and we expect the range will likely be Rs 80 – Rs 120 thousand crore with the occasional outlier.

RBI is unlikely to take any new steps in this week. Globally, too, no major interest rate actions are expected from the various central banks with the G20 meet unlikely to produce anything significant. Expect the market to focus on weekly inflation, crude prices and FII flows during the week.

(By Manish Sarraf, Head Treasury, Dhanlaxmi Bank)