Unchanged CRR and hawkish RBI's tone push bond yields higher

03 May 2013 Evaluate

Pre Monetary Policy Statement for the year 2013-2014:

Bond yields hardened after the central bank report underscored limited room for further monetary easing in this fiscal year, thereby denting hopes of a more dovish stance. As per the survey, though demand-side inflation pressures reduced, high consumer price inflation along with the current account deficit (CAD) well above sustainable levels, limits the space for monetary policy to support growth.

On the global front, US Treasuries traded sideways on Thursday with yields holding near their four-month lows as investors waited on Friday's highly anticipated payrolls employment report for signs whether the pace of economic growth is worsening more than expected. Meanwhile, Brent crude held below $103 a barrel on Friday, holding on to most of its steep gains from the previous session when an interest rate cut by the European Central Bank boosted investors' appetite for riskier assets.

Back home, the yields on 10-year 8.79% - 2021 bonds were trading 5 basis points higher at 7.77% from its previous close of 7.72% on Thursday.

The benchmark five-year interest rate swaps were trading 4 basis points higher at 6.96% from its previous close of 6.92% on Thursday.

Additionally, Government of India have announced the sale (re-issue) of four dated securities for Rs 15,000 crore on May 3, 2013, which includes, (i) “7.83 percent Government Stock 2018” for a notified amount of Rs 3,000 crore (nominal) through price based auction; (ii) “8.33 percent Government Stock 2026” for a notified amount of Rs 6,000 crore (nominal) through price based auction; and (iii) “8.97 percent Government Stock 2030” for a notified amount of Rs 3,000 crore (nominal) through price based auction, (iv) “8.83 percent Government Stock 2041” for a notified amount of Rs 3,000 crore (nominal) through price based auction. The auctions will be conducted using multiple price method. The auctions will be conducted by the Reserve Bank of India, Fort, Mumbai on May 3, 2013 (Friday).

Post Monetary Policy Statement for the year 2013-2014:

Bond yields rose further after Reserve Bank of India (RBI), in its ‘Monetary Policy Statement 2013-14’, reduced repo rate by 25 basis points from 7.5% to 7.25% with immediate effect, its lowest since May 2011, in order to prod the sputtering economy. But left Cash Reserve Ratio (CRR) unchanged from present 4%. Meanwhile, the Reserve Bank also proposed to reduce the proportion of bonds Indian banks are permitted to hold in the so-called held-to-maturity category to 23% from 25%. Further, providing guidance in its monetary policy statement, central bank suggested of ‘little space’ for further monetary easing given the overall balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamic yields.

The yields on 10-year 8.79% - 2021 bonds were trading 7 basis points higher at 7.79% from its previous close of 7.72% on Thursday.

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