Interest rate clarity on the cards
The mid-term review of the monetary and credit policy, which is scheduled to be announced by the Reserve Bank of India (RBI) on October 29, will provide a direction to the government securities market this week.
Participants have been in a state of confusion as the banking industry is vertically divided on the rate cut front. While one sector is pushing for a cut in repo (5.75 per cent now) and bank rate (6.5 per cent), another is for status quo.
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Some treasury managers have taken the line that the central bank will cut at least one of the rates, if not both the bank rate as well as repo rate, others believe the rates will be left unchanged and the central bank is comfortable with the present state of affairs.
The RBI, on its part, instead of giving any signal has confused the market further. RBI governor Bimal Jalan has recently said that he was comfortable with the low yields on gilts. This, along with the absence of any open market operations (OMO) by the central bank, have been interpreted as an indication for a possible rate cut.
But then the central bank has all along been saying about its bias towards soft rates and there is nothing new about Jalans comment, feel some bankers.
The net result of this is confusion and a majority of the players staying on the sidelines last week and refraining from taking any position.
In fact, on Saturday, scepticism led the markets to turn sluggish and even primary dealers, who are known to be aggressive traders, chose to stay liquid.
Some banks, especially foreign banks, however bought on the expectation of a rate cut. The 7.40 per cent 2012 paper, which was last dealt at Rs 102.35 (yield: 7.056 per cent) on Friday, was traded at a slightly higher price of Rs 102.40 (yield: 7.047 per cent) on Saturday.
Players have already discounted a 25 basis points cut in the repo rate because, given the liquidity overhang in the banking system, the feeling is that the RBI will want to bring down its cost of managing banks funds via the repo window.