Here's how RBI policy impacted government bond market

The government bond market has rallied after the Reserve Bank of India sprang a surprise by keeping the rates unchanged in its mid quarter monetary policy.

The benchmark ten year bond yields on Wednesday dropped 12 basis points or 135 per cent to close at 8.78 per cent hitting two-week low. Bond prices spiked 84 paisa or 84 per cent to Rs 100.28. Yields and bonds move in opposite direction.

“Markets are clearly surprised by no increase in interest rates,” Mohan Shenoy treasury head at Kotak Mahindra Bank. But, inflation pressure is not going to subside anytime soon. “The December inflation will decide the next course of (policy) action. The ten year yields are expected to trade in the range 8.70-9 per cent.”

In an ET poll of 20 institutions, 17 had expected a 25 basis point rise in the repo rate, at which banks borrow money from the central bank. One basis point is a hundredth of a percentage point.

There is reason to wait before determining the course of monetary policy, the central bank said in the policy statement suggesting that vegetable prices may be coming down.

“It is RBI’s forward looking policy and market is also on a wait and watch mode,” said Sandeep Bagla, executive vice-president, ICICI Securities Primary Dealership. “Although it is not a victory on inflation but the excessive negative sentiment has gone out.”

The Indian rupee fell eight paisa or about 13 per cent to 62.10 against the US dollar ahead of the Federal Reserve meet that may indicate on rolling back of US monetary largesse.

“Globally markets were preparing for it,” Pramit Brahmbhatt, CEO at Alpari India. “Some investors were cautious ahead of the US FOMC meet. Any semi-positive outcome from it will lead to a stronger rupee against the greenback tomorrow.”