Yields on Government securities rose to the highest level in two weeks following the mid-term 25 bps rate hike by RBI on last Friday. Benchmark 10 year bond, 7.80% 2020 security rose 8 bps to 7.64% from 7.56% close of last week.

As expected, yields opened stronger on Monday, but later were dragged down due to buying in the securities. Due to reduced fiscal deficit, RBI had announced a reduced borrowing last week. Same was expected for the week as well. But RBI announced the issue of securities worth Rs 12,000 cr. Along with this, rally in US treasuries kept the sentiments up in bond market. Yields weakened till 7.57% on Wednesday.

Liquidity conditions eased slightly compared to the last week. Amount borrowed from RBI’s repo window averaged above Rs 50,000 cr for the week. Indian Financial Services Secretary R Gopalan commented that liquidity crunch in the Indian banking system was expected to ease in the next 10-15 days.

Benchmark 10 year bond daily movement

However, with the release of stronger weekly inflation figures, yields again started hardening. the primary articles index moved up by 1.4% marking a YoY inflation growth of 16.08% as compared to 14.75% observed a week earlier. The Fuel and power index rose steeply by 4.5% taking the inflation rate to 18.02% compared to 12.9% a week earlier. The index factored in higher prices of petrol, diesel, kerosene and LPG as announced by the Government on June 25th.

Markets clearly are factoring in another rate hike at the July 27 announcement of First quarter review of monetary policy. All fixed income market rates have hardened. While commercial paper rates were seen hardening since June beginning, G-sec rates have started hardening recently. Next week we have Index of Industrial Production (IIP) and WPI monthly release both of which would be important guiding factor for RBI to decide on interest rates.

To read earlier updates click here

 

Author:Praveen Bajaj

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