The bond market sprung a surprise with only a marginal rise in yields on a day when the Reserve Bank of India raised the cash reserve ratio by 75 basis points (bps) to suck out excess liquidity in the system.
RBI kept policy rates (repo and reverse repo rates) unchanged. The CRR hike was 25 basis points higher than what the market had estimated. CRR will be 5.75 per cent by the end of February 2010. The effect of the rise will be spread over a month.
The current bonds yields have already factored in an upward revision in inflation estimate to over 8 per cent.
The yield on the benchmark 10-year paper (6.35 per cent 2020) closed at 7.58 per cent today as against 7.55 per cent yesterday, according Negotiated Dealing System (NDS) data.
It is rare for the bond yield on the benchmark paper to move just 3-4 basis points in response to the policy review. There was a surprise element (CRR hike), said J Moses Harding, executive vice-president with IndusInd Bank.
Yields have eased in the second fortnight of January 2010 after remaining elevated, often crossing the 7.75 per mark. A senior treasury official with State Bank of India said the yields would remain range-bound unless RBI announced some tough action to manage inflationary expectations.
Call rates remain steady despite CRR hike
The interest rates in inter-bank overnight lending market remained steady on ample liquidity in the system.
The call money rate ended unchanged around 3.25 per cent, as liquidity enabled banks to raise funds at the lower end of the interest rate corridor, dealers said.
The CRR hike will be implemented in two stages. A first rise of 50 bps will be effective from the middle of next month and the second rise of 25 bps will be operational from the end of the next month. The decision will take out Rs 36,000 crore out of the system.
“Liquidity is abundant in the system as usual and demand was not seen much today because of advance covering of reserves by banks. So, there was downward pressure on CBLO rate,” said a dealer at a state-owned bank.
Today, the central bank raised CRR by 75 bps in two stages. The first, a 50-bps hike, will come into force on February 13, and the second, a 25-bps hike, will be effective from February 27.
