CRR blues for gilts, equities

The yield on the 10-year benchmark government security is expected to breach 8 per cent and rule in the range of 8.05-8.10 per cent tomorrow, following the hike in the cash reserve ratio (CRR) by the Reserve Bank of India late Tuesday.

The surprise CRR hike is also likely to further dampen sentiment on the bourses. The bellwether Sensex index lost about 448 points in the first two days of the week and the trend is likely to continue on Wednesday, say market players.

"If the market opens lower tomorrow, we expect a steep fall," said a technical analyst with Techno Shares & Stocks.

According to Kashyap Jhaveri, banking analyst with Emkay Stock Broking: "Banking stocks have already come down 7-8 per cent in last two days, and we expect them to go down 2 per cent further in the days to come. Also, the hike would curb loan availability by 1-2 per cent."

According to bank dealers, even as the market has factored in the hike in CRR, the worrying factor is the implementation of the measure with immediate effect from February 17 which will further mar sentiment.

The measure is aimed at draining around Rs 14,000 crore from the market so as to contain money supply and its impact on inflation. However, dealers said RBI intervention will continue in the forex market to supply rupee funds to the domestic market by buying dollars. This will also help in preventing a sharp appreciation in the rupee.

Gilts fell by more than 90 paise in the long end and around 50-60 paise in the short- and medium-term, in a knee jerk reaction to the statements of the RBI deputy governor.

The yield on the 10-year benchmark paper closed at a high of 7.90 per cent after reaching an intraday high of 7.96 per cent against a close of 7.83 per cent on Monday.

Gilt dealers are of the view that short term yield curve has risen over the last few months in tandem with measures taken by the RBI to quell inflationary expectations.

However the long end is yet to follow suit. Therefore the spread between the 1-year and 10- year gilt has narrowed over the months rather than widening. The curve may steepen hereafter, said a dealer.

Meanwhile, the correction in the equity market has reined the appreciation in the spot rupee. The rupee opened lower on Tuesday at 44.18/19 against a close of 44.15/16 on Monday.

During the day, correction and consequent dollar buying by banks led to the spot rupee to reach an intraday low of 44.23/24 before closing flat.