Gilt yields fell for the ninth consecutive trading session on Thursday on expectations of a repo rate cut and easing inflation. The street is expecting the Reserve Bank of India (RBI) to cut the repo rate by at least 25 basis points in the third-quarter review of the monetary policy on January 29. The repo rate is currently at 8 per cent.
The yield on the 10-year benchmark gilt 8.15 per cent 2022 ended at 7.97 per cent on Thursday, compared with the previous close of 7.99 per cent. This is the third consecutive trading session when the yield on the 10-year benchmark gilt ended below the 8 per cent mark. A month ago, the yield was at 8.17 per cent.
“The rally in the gilts market is because of hopes of a repo rate cut expected later this month. Besides, the RBI shifted a gilts auction scheduled this week and said it would conduct open market operations (OMO) purchase auction of gilts up to Rs 8,000 crore on Friday,” said Prasanna Patankar, senior vice-president at STCI Primary Dealer.
The easing liquidity is also helping gilt yields to fall. Bank borrowed Rs 94,860 crore on Thursday under the RBI's Liquidity Adjustment Facility (LAF) compared with a borrowing of Rs 97,360 crore on Wednesday.
The street expects the RBI to cut the repo rate by at least 25 basis points later this month. The December Wholesale Price Index (WPI) data is expected later this month. According to Patankar, if the December inflation is somewhere close to 7.25 per cent, then a 50 basis points cut in the repo rate is also possible. The WPI rose 7.24 per cent from a year earlier in November compared with October's 7.45 per cent.
According to S Srinivasaraghavan, executive vice-president and head, treasury, of Dhanlaxmi Bank, if the RBI cuts the repo rate by 25 basis points on January 29, then the yield on the 10-year benchmark gilt will drop to 7.85 per cent, and if there is a 50 basis points cut in the repo rate, the yield may drop to 7.75 per cent.
The street is also hoping that before the monetary policy review, the yields on the 8.15 per cent 2022 gilt may drop to 7.90 per cent in anticipation of a rate cut.