Bonds rise despite 50-point RBI rate hike!  Here's why

Bonds rise despite 50-point RBI rate hike! Here’s why – Mail Bonus

NEW DELHI: Government bonds enjoyed strong buying support on Wednesday despite the Central Bank of India’s 50 basis point rise in interest rates, as the central bank avoided further reducing the banking system’s liquidity surplus with a new increase in the cash and cash equivalents. , said the salesmen.

The rise in bond prices on Wednesday could also be due to some traders fearing a steeper rise in interest rates than the 50-point rise announced by the RBI. Bond yields fall as prices rise.

The yield on the 10-year benchmark 6.54 percent 2032 paper fell to a minimum of 7.43 percent, nine points lower than at the close on Tuesday, 7.52 percent.

Falling yields on government bonds lead to lower borrowing costs throughout the economy, but reduce the burden on stock valuations.

Although the bond market theme is one more that yields are heading higher – given more RBI rate hikes and a huge government-announced borrowing plan – the prevailing market sentiment was eased.

Traders who had bet that bond prices would fall following the RBI’s policy statement were quick to get rid of these positions in the secondary market, pushing the price forward.

“In recent days, expectations have changed slightly. “Some also expected more than 50 points and expectations of a CRR increase were also high,” Shailendra Jhingan, chief executive officer and chief executive officer, told ET Markets.

“In addition, the location is also driving the rally. Maybe the market was a little short; and now after the event, people are covering. The theme does not change; yield pressures continue broadly.

In the near future, however, sellers do not see a 10-year yield below the 7.37 percent mark.

Many aspects of Wednesday’s policy statements were on track, as the market calmed down RBI’s rise in inflation forecasts.

Shaktikanta Das, RBI’s central bank governor, said on Wednesday following the effects of rising crude oil prices during the war in Ukraine and said on Wednesday that consumer price inflation was 6.7 percent in the current fiscal year, with the price index not falling below the 6 percent mark until January-March. .

The Monetary Policy Committee has a mandate to keep total retail inflation in the range of 2-6 percent, with a medium-term target of 4 percent.

It is therefore a given that interest rates will rise even further.

“We believe that the first break will be only at a 6 percent repurchase rate. Depending on how international uncertainty is resolved. Suppose the average inflation of FY24 is in the 5-5 percent handle, then the 6 percent repo rate will be appropriate for that. We think they will take it to 6 percent and then evaluate, “said Jhingan.

Despite tighter financial conditions, the bond market welcomed the fact that the Central Bank had not taken any new measures to wipe out excess liquidity from the banking system.

By May, the RBI had raised the CRR by 50 points; a measure that was estimated to take out close to 1 lakh crore of liquidity from the banking system.

Admittedly, the RBI is determined to reduce its excess liquidity position – which is close to 4 lakh crore – in stages, but for the moment, the decision to continue patting CRR provided some comfort to traders amid a huge supply of bond pressure.

In the current financial year, it is estimated that the government will sell bonds with a record value of Rs 14.3 lakh crores on a gross basis. Of these, about 20 percent have been borrowed so far.


The unchanged state of the CRR resulted in large purchases of short-term securities, which are more sensitive to liquidity conditions.

The yield on the 5.76% 2026 paper for four years fell by up to 16 points as traders rushed to make short bets in the paper, the sellers said.

“The status quo on CRR was maintained, which is also good news for the short end of the yield curve and in line with the staggered normal liquidity position,”

AMC, Investment Manager, Lakshmi Iyer said.

“For fixed investors, stay in the middle of the risk-averse return curve.

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