Bond yields rise 25 bps after reverse repo hike

The yields on government bonds today rose by as much as 24 basis points (bp) soon after the Reserve Bank of India (RBI) raised short-term reverse repo rate by 25 basis points to 5.5 per cent, dealers said.

The yield on the actively traded 8.07 per cent 2017 bond increased by 14 basis points to 7.31 per cent, as its price fell to Rs 105.63 from yesterday's close at Rs 106.50.

The short-term yields rose more sharply. The yield on the 11.90 per cent 2007 bond rose to 6.63 per cent from 6.39 per cent. The reverse repo rate has been hiked four times in the last 18 months, with three of the increases in 2005-06, itself. All the hikes were by 25 basis points.

The yield on 7.37 per cent 2014 bond also rose by 9 basis points to 7.10 per cent from the opening quote of 7.01 per cent.

The market had not expected any rate hike in the third quarterly review of the annual monetary and credit policy as banks had already jacked up their lending rates prior to the policy announcement, said analysts.

"The market participants were surprised with the rate hike. The yield on short-tenor government stocks and other short-term market instruments will witness a spurt of 15-20 basis points, while the long-end stocks is expected to move in the range of 5-10 basis points," said Kotak Mahindra Bank's group president, treasury, Mohan Shenoy.

By tinkering with the reverse repo and repo rates, the RBI has signalled that only short-term rates are set to harden. Hence the yields on medium to long-tenure government stocks look stable, he explained.

The market was lacklustre in the morning session, before the reverse repo rate hike was announced. Following the rate hike, banks were seen selling mostly near-term bonds. Bankers are wary of holding on to short-term bonds and were selling them at a loss.