Bond yields slip on surprising 50 basis point rate cut

Pre RBI’s Annual monetary policy review:

Bond yields were trading almost steady as speculators abided by the cautious approach ahead of the central bank's Annual monetary policy review on April 17, 2012. Besides expecting a 25 basis point rate cut, trader’s will be closing watching for cues on growth and inflation as worries about high commodity prices and a heavy fiscal deficit have prompted some analysts to scale back rate cut forecasts for the year.

On the global front, US Treasuries were little changed in Asia on Tuesday, their yields inching down slightly, ahead of Spain's sale of 12- and 18-month Treasury bills later in the session which will give more clues to investor confidence in that country's ability to finance its debt.

Meanwhile, Brent crude slipped to $118 on Tuesday, continuing its steep decline from the previous session, as Spain's debt woes reignited demand growth concerns and threatened to derail the global economic outlook. Investors remained cautious as Spanish government bond yields broke through the 6 percent mark on Monday for the first time since December, stoking fears that the euro zone's fourth largest economy may need an international bailout.

Back home, the yields on 10-year benchmark 8.79% - 2021 bonds were at 8.47% from its previous close of 8.45% on Monday, after the central bank warned of persistent upside risks to inflation late Monday. However, traders continue to expect a 25-basis-point cut in the key lending rate on Tuesday.

The benchmark five-year interest rate swaps also trading at 7.51% from its previous close of 7.48% on Monday.

The Government of India have announced the sale (re-issue) of four dated securities for Rs 16,000 crore on April 20, 2012, which include (i) “8.19% Government Stock 2020” for a notified amount of  Rs 4,000 crore (nominal) through price based auction, (ii) “9.15% Government Stock 2024” for a notified amount of  Rs 7,000 crore (nominal) through price based auction (iii) “8.97% Government Stock 2030” for a notified amount of  Rs 2,000 crore (nominal) through price based auction and (iv) “8.83% Government Stock 2041” for a notified amount of  Rs 3,000 crore (nominal) through price based auction.

Additionally, the Reserve Bank of India has announced the auction of 364-day and 91-day Government of India Treasury Bills for notified amount of  Rs 5,000 crore and Rs 9000 crore respectively . The auction will be conducted on April 18, 2012 using 'Multiple Price Auction' method.

Also, Government of Manipur has announced an Auction of State Development Loans 2022 of Rs 75.00 crore on April 17, 2012.

Post RBI’s Annual monetary policy review:

The yields on 10-year benchmark 8.79% - 2021 bonds fell at 8.39% from its previous close of 8.45% on Monday post Reserve Bank of India cut interest rates on Tuesday for the first time in three years by an unexpectedly sharp 50 basis points to give a boost to sagging economic growth.

Consequent to this, repo rate under the liquidity adjustment facility (LAF) now stands at 8%, while the reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, gets calibrated to 7%. Further, in order to provide greater liquidity cushion, RBI also hiked the borrowing limit of scheduled commercial banks under the marginal standing facility (MSF) from 1 per cent to 2 per cent of their net demand and time liabilities (NDTL) outstanding at the end of second preceding fortnight with immediate effect.

However, Subbarao, Governor of RBI also pointed that the state of the economy as a matter of growing concern. He said, ‘though inflation has moderated in recent months, it remains sticky and above the tolerance level, even as growth has slowed. Significantly, these trends are occurring in a situation in which concerns over the fiscal deficit, the current account deficit and deteriorating asset quality loom large. In this context, the challenge for monetary policy is to maintain its vigil on controlling inflation while being sensitive to risks to growth and other vulnerabilities.