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An unexpected rate hike of 25 basis points by Reserve Bank of India following the Urjit Patel committee report on CPI (consumer price index) inflation targeting, another round of tapering of $10bn by the US Fed with indications for more tapering in the coming month and continued turmoil in emerging markets with rate hikes by Turkey, South Africa and Brazil resulted in sustained selling in debt markets this week with the benchmark 10-year government bond yield hitting an intra-week high of 8.87 per cent. Notwithstanding a sharp decline in headline December inflation, RBI hiked repo rate by 25 bps from 7.75% to 8.00%, partly due to higher core inflation and partly due to renewed volatility in emerging markets. Due to safe haven buying though, the US 10-year yield eased sharply to 2.64% as global equity markets corrected sharply.
RBI also indicated that if inflation continues to decline in line with current projections, no further rate hikes may be required. Supported also by attractive valuations, 10-year government bond yields declined on bargain hunting in closing hours of the week closing at 8.77 per cent, up only about 4 bps for the week in spite of the event filled week. The dollar also strengthened to 1.3478 from 1.3678, against the euro for the week, due to strong economic outlook for US. While the rupee touched a nine-week low of 63.30 mid-week on slowing foreign flows and emerging market concerns, it ended the week flattish at 62.66 as rate hike helped improve sentiment for the local currency. Five year AAA yields rose 10bps to 9.74 from 9.64% while 10Y AAA yields rose by 2 bps to 9.66 from 9.64 amidst dull volumes. In post market hours, IIP data for core industries came in slightly better at 2.1%, while government revised downwards its FY13 GDP growth estimate to 4.5% from its earlier projection of 5%.
Liquidity situation broadly remained stable as liquidity adjustment facility balances declined from Rs 35,300 crore to Rs 31,500 crore and marginal standing facility balances remained negligible at Rs 70 crore from Rs 3,500 in previous week. Three month certificate of deposit rates rose 27 bps from 9.27% to 9.44% and one year CD rates also spiked to 9.65% from 9.33% due to a surge of issuances from banks.
Bond yields are likely to remain in a tight range this week after the recent sell-off. High inflation and global turmoil will not make a case for any sustained rally in the near term. Even then, with only one auction remaining till March and expectations of further decline in January inflation, the market may attract bargain hunting periodically. Short term rates may inch up some more due to seasonally tight liquidity and heavy issuance from banks.
The author is executive director & CIO - fixed income at Pramerica Asset Managers
