Bonds extend losses, yields hit six-week high
Mumbai: Government bonds extended losses a day after the Reserve Bank of India sprang a surprise keeping the policy rate unchanged despite consensus expectation of a quarter point cut.
The benchmark yield rose six basis points hitting six-week high Friday. It closed at 6.67 percent compared with 6.46 percent Wednesday. Bond yields rise when prices fall. A basis point is 0.01 percentage point.
“The market was expecting a rate cut of at least 25 basis points from the MPC (Monetary Policy Committee), with some sections expecting an even more significant cut,” said Siddharth Shah, senior vice president, STCI Primary Dealership.
“The market feels that given the revised inflation target set by RBI, the likelihood of a prolonged period of no rate cut is high,” he said.
Retail inflation in the second half has been pegged at 5.1-4.7% against 3.5-3.7% estimated in the previous policy.
Mind Street announced its bi-monthly policy on Thursday. It retained the repo, the rate at which banks borrow short-term money from RBI, at 5.15 percent citing concerns over consumer price rises. The central bank kept the door open for further monetary easing based on “unfolding situation”.
RBI action disappointed the market as traders anticipated a cut following New Delhi’s sluggish economic growth. The 10-year sovereign yields are expected to be in the range of 6.55-6.75 percent in the near term untill the next bi-monthly policy that falls due in February.
Long term investors including insurers, pension funds were seen buying while banks, mutual funds were spotted selling.
The weekly auction, conducted by the RBI, reflected demand for long-term papers. The central bank accepted bids double the actual size for papers maturing in 2039.
“RBI tweaked the auction as it halved the size of shorter maturity papers (2026). The same was added for long dated papers,” said a trader from a large bond house.