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Yields on government bonds have witnessed wide fluctuations as participants speculated on the impending rate hike—but the government still remains non-committal on the timing of this move
Over the past few days, yields on the benchmark 10-year bonds have seen volatile movements, as traders speculate on the awaited monetary actions by the government. Although the Centre has given strong signals for a withdrawal from its supportive stance on interest rates, it is not clear when and how the government will put its plans into motion.
The yield on the 6.35% note due January 2020 fell two basis points to 7.55% yesterday after Planning Commission deputy chairman Montek Singh Ahluwalia dismissed rumours of the Reserve Bank of India (RBI) raising interest rates before the January monetary policy review. Earlier, the 10-year bond yields were pushed to their highest level in about 14 months, amid speculation that rising inflation would prompt the central bank into hiking interest rates.
Indeed, the government has been sending mixed signals from time to time, with no clear indications of the timing and extent of rate hike. It has been putting off the upward revision in interest rates in the light of continued sluggishness in credit growth. Bank credit grew by just 10.5% in November, which may force the RBI to further bring down its credit growth target from 18%. At the same time, the rapidly accelerating food and wholesale price inflation is keeping the central bank on its toes.
This has also put bond markets in a spot of bother. RVS Sridhar, treasury head of Axis Bank confirms, “Currently, the bond market is worried about the rate hike. It is not sure what would be the extent of action, though it knows that RBI would tighten rates soon. At some stage, in the matter of the next few quarters, markets are pricing in the hike in reverse repo rate.”
The RBI is widely expected to implement a hike in the cash reserve ratio (CRR), the percentage of excess reserves banks should keep with the RBI, sometime around January. Mr Sridhar also believes that there is a high probability of CRR hike from next month. “It could be announced even before the policy. Hike in the reverse repo rate, to my mind, is unlikely before June 2010.”
Mr Sridhar opines that the 10-year yields will move in a band of 7.50%-7.75% until March 2010. He expects rates to remain around 7.75% around June.