Foreign rate hikes fail to scare domestic bond mkt

In June, within hours of an interest rate hike by the European Central Bank (ECB) and the central banks of Thailand and Korea, the Reserve Bank of India (RBI) hiked its short-term policy rate. Today, once again the ECB hiked its rate by a quarter percentage point to 3 per cent.

The Bank of England, too, hiked its rate by an identical margin to 4.75 per cent, bringing it back to the August 2005 level when it cut its policy rate by a quarter percentage point.

The Reserve Bank of Australia also hiked its rate from 5.75 per cent to 6 per cent yesterday. Despite this, the bond market was unfazed and the yield on the 10-year benchmark paper remained unchanged at 8.29 per cent.

Bond dealers and senior bankers do not see any immediate impact on the outlook on interest rates in India. "The ECB rate hike has already been accounted for and the Bank of England action was also not entirely a surprise. Things will be different if the US Fed raises its fund rate," said a bond dealer with a primary dealer outfit that buys government securities.

The Federal Open Market Committee (FOMC), the policy making body of the US Fed, is unlikely to raise the Fed fund rate at its August 8 meeting. Bankers also do not expect it to raise the rate in its next meeting on September 28.

"We don't see any change in our interest outlook. By hiking the policy rate twice in June and July, the RBI is ahead of the interest rate curve. It does not need to catch up with other global central banks at this juncture," said a bank chairman.