Reddyspeak takes wind off gilts

Halts rally that saw benchmark yield at four-month low.

The Reserve Bank of India (RBI) governor Y V Reddy's slightly hawkish comments halted a rally in the bond market that had pulled down the yield on the benchmark bond to four-month lows.

The RBI governor, speaking to reporters on the sidelines of a conference in New Delhi, said, "We are most concerned about inflationary expectations. Unless there is a convincing reason that oil prices are easing off on a sustained basis, inflationary expectations will not be significantly altered."

The yield on the benchmark 10-year bond ended at 7.68 per cent from yesterday's close of 7.61, which was the lowest since May 25.

Referring to the US Federal Reserve's decision yesterday to hold its key rate at 5.25 per cent for the second consecutive time, Reddy said "there is no one-on-one link between the monetary policy decisions in the United States and in India."

Oil prices have dropped to six-month lows this week. The price of India's crude oil basket fell by $3.09 per barrel to $57.82 a barrel yesterday.

"As you have noticed, we always make distinction between permanent component and non-permanent components of oil. We still believe that permanent components continue to be what we broadly judge as it would be," Reddy added.

He said the RBI was not changing its estimates for inflation and growth that stand at between 5-5.5 per cent and 7.5 - 8 per cent respectively for 2006-07. RBI will undertake its next review of 2006-07 monetary policy on October 31.

Dealers said the market is still bullish and expects the 10-year yield to fall further over the next two weeks with buying demand from banks, particularly public sector banks, to meet statutory liquidity ratio (SLR) requirements.

Bonds have rallied in recent weeks from a 4-1/2-year high of 8.43 per cent in July as uncertainty over interest rates and government bond supplies subsided.

The reverse repo rate, the rate at which banks park excess funds with RBI, is at 6 per cent, having been raised three times in 2006 to fight inflation pressures.