Post RBI policy: Bonds draw comfort from future guidance, rupee steady

MUMBAI: The ten-year benchmark bond yield has increased eight basis points to 8.80% pushing prices down immediately after the Reserve Bank of India hiked its policy or repo rate by 25 bps to 8%. But later, it pared its losses to trade at 8.74% at 11:25 hours on Tuesday.

Repo is the rate at which banks borrow funds from the central bank.

“Yields rose in a knee-jerk reaction,” said Mohan Shenoi, head – treasury at Kotak Mahindra Bank. “But markets drew comfort from the governor’s future guidance. After this latest rate hike, the central bank may not raise rates further.”

In the mid-quarter policy last December, markets were expecting a rise of 25 bps but the central bank had not changed rates. In the latest quarterly policy the Reserve Bank hinted at no further rate hikes.

“The extent and direction of further policy steps will be data dependent,” RBI governor Raghuram Rajan said in the quarterly policy statement. “…though if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture.”

Bond prices fall when interest rates in the economy rise. This is because of a drop in demand for existing bonds which offer a lower return compared to new bonds which may be issued by the government and corporates to fund their activities.

The partially convertible rupee is trading steady at 62.97 per US dollar at 11:51 hours after hitting an intra-day low at 63.18 in the early trade. It fell to a two-and-a-half month low as against the dollar on Monday, tracking weakness in other emerging market currencies against the greenback.

“The rise in the interest rate is likely to attract more foreign funds. It gives opportunity for overseas investors to earn a better return for their investment in India,” said a dealer from a large bank.