Reversing an early trend of softness, the yield on government bonds hardened as the Reserve Bank of India kept on hold the repo rate, showing its concerns over inflationary pressures and the fiscal deficit.
Bond dealers and treasury executives said market sentiment was euphoric (soft yield) before the announcement, expecting a rate cut. They moved up soon after RBI kept the repo rate on hold. The yield on the 10-year bond, benchmark paper, hovering at 8.11 per cent, moved up to 8.16 per cent within a minute of the RBI announcement. It ruled at 8.18 per cent in closing trade, the same as at close on Friday, according to Clearing Corporation of India data.
N Venkatesh, chief general manager (treasury), IDBI Bank, said RBI had cut the cash reserve ratio to ensure adequate liquidity. But its message on reining in deficit and inflationary pressure was quite strong, pushing yields up.
RBI said the inflationary pressures persist. Also, risks are emerging from twin deficits — the current account deficit and fiscal deficit. Both (inflation and deficit) constrain a stronger response of monetary policy to growth risks.
Inflation as measured by the Wholesale Price Index (WPI) has remained sticky at around 7.5 per cent in the current financial year.
The easing of vegetable prices in July-August was to a large extent offset by the surge in prices of cereals and pulses.
A treasury official with an associate bank of State Bank of India said the yield on the benchmark may move up a few basis points tomorrow but then move around 8.2 per cent levels.