Reddy balm for bonds

Reserve Bank of India Governor Y V Reddy's comments on inflation pressures and monetary policy action brought some relief to the nervous bond markets, which saw yield on the 10-year paper touching 8.76 per cent in morning trade.

The government securities (G-Sec) market opened lower due to continuance of negative sentiment on Friday. The market was bearish due to the devolvement on primary dealers in the auction of a longer-term security held on Friday.

Also, double-digit inflation sparked fears of an immediate policy action. The benchmark 10-year security yields hardened considerably and were seen around 8.76 per cent in the morning, according to review by IDBI Gilts.

The bond market witnessed thin trading in the morning. The turnover in government bonds on the Negotiated Dealing System (NDS) was about Rs 430 crore around 12 noon. It was much below the normal trading levels in early trades, said the trader with a large public sector bank.

However, the market sentiment improved after comments from Reddy in Pune indicating that the rate of inflation would be brought down to comfortable levels through 'calibrated' steps. The yield eased to 8.63 per cent at close of trading today. The governor also stated that the outlook on food was 'optimistic'. 
  

GOVERNMENT SECURITES MARKET
Security	20-Jun		23-Jun
	Price	Yield (%)	Price	Yield (%)
8.24%, 2018	97.4525	8.6266	97.3500	8.6426
7.59%, 2016	No quotes	No quotes	93.7500	8.7072
7.38%, 2015	93.3500	8.6367	92.6000	8.7862
7.99%, 2017	95.5050	8.7183	No quotes	No quotes
8.33%, 2036	93.5000	8.9671	94.2000	8.8819
Source: NW18

He mentioned that RBI had taken 'pre-emptive measures' anticipating the price pressures. The market interpreted from the comments that there would not be any immediate policy action.

A drop in the value of securities will put pressure on the profits of the banks as they will have to make provisions for erosion in value. On Saturday, the government indicated that RBI will take further monetary steps to curb inflation. Market players, therefore, preferred to be on sidelines thinking any announcement made by RBI would harden yields further.

The market had estimated a 25 basis point increase in the cash reserve ratio (CRR), an amount banks have to keep with RBI as a percentage of deposits. At present, CRR stands at 8.25 per cent.