Rate hike takes toll on gilt prices

The 25-basis point rate hike announced by the Reserve Bank of India on Thursday resulted in a crash in the government securities market, while the spot rupee-dollar exchange rate could recover some of its losses recorded earlier this week.

The government securities market tanked in the beginning of the trading session with banks turning into a sell mode to stop losses in their portfolio.

However, once the fall was over, the market witnessed a buying demand across maturities from cross-section of market players, ranging from banks, mutual funds and insurance companies.

While the prices of government securities fell across maturities by 70-80 paise, the yield on the 10-year benchmark paper 7.59 per cent 2016 closed at a 5-year high of 7.82 per cent, which was last seen in May 2001 against 7.67 per cent on Thursday.

As an ultimate sign of panic, the overnight interest rate swap rates for five-year maturity "� a benchmark for the interest rate hedging in the government securities market "� shot up to an all-time high of 7.17 per cent. Banks scurried for interest rate cover to cut losses, following a rapid rise in the yields.

This led to volumes in the swap market going up to a high of Rs 10,000-12,000 crore from Rs 2000-3000 crore on Thursday.

The spot rupee, on the other hand, strengthened on the back of foreign exchange inflows in tune with the recovery of the equity market. It today opened at 45.96/97 and recovered to 45.89/90 before closing at 45.99 to a dollar.

The spot rupee had reached an intraday low of 46.13 to a dollar on Thursday in sync with the stock market meltdown.

With rising interest rates and costs of funds, the premiums on the forward dollars shot up; six-month and one-year annualised premiums on forward dollars closed higher at 0.98 per cent and 1.07 per cent respectively than 0.80 per cent and 0.98 per cent respectively on Thursday.