Gilt yields go up as banks sell

Credit policy: The day after

Gilt yields inched further up today as banks continued to sell bonds after the Reserve Bank of India (RBI) hiked the repo rate by 25 basis points to 4.75 per cent yesterday. The benchmark 10-year paper (7.38 per cent, 2015) closed the day at 6.91 per cent against 6.89 per cent on Tuesday.

Enthused by statements from the finance ministry and RBI officials, traders had built up positions on the assumption that there would be no hike in the repo rate. However, the 25 basis points hike jolted the markets and led to a selling spree.

Dealers said policy announcements pointed to inflation becoming a major concern for the central bank.

Meanwhile, the central bank today set a higher cut-off yield at the auction of treasury bills. The cut-off price was set at an effective yield of 5.3653 per cent from 5.2006 per cent in the previous week's auction, as the RBI lowered the cut-off price to Rs 98.68 from Rs 98.72.

Similarly, the yield on the 364-day treasury bill at the cut-off price increased from 5.4891 per cent to 5.6903 per cent, with the cut-off price lowered to Rs 94.63 from Rs 94.81.

The volume of trade in the bond market was less than yesterday as traders were keenly assessing the policy statements. The overnight call money rate, however, closed lower at 4.50 per cent against 4.60 per cent at close yesterday.

Dealers said nothing much should be read into the rise in call rates as they were still in a steady range.