Fed hike knocks off Re, gilts

Government bonds weakened and the rupee edged down following the 25 basis points increase in the US rates by the Federal Reserve, strengthening expectations of a rise in the reverse repo rate.

Dealers said inflationary pressures were also building up, adding to the need for a 25 basis points increase in the reverse repo rate from the present level of 5 per cent in the next month's second quarterly review of annual monetary policy. One basis point is one hundredth of one per cent.

The entire impact depends on the course of oil prices and the movement in inflation rate. A possible hike in reverse repo rates was expected to the extent of 25 basis points, a treasury head with a leading public sector bank said.

The rupee edged down spurred by dollar buying by importers worried that the US currency could remain firm in the medium-term.

"We saw lots of custodial banks buying dollars in the morning once stocks started falling and that triggered some build-up of long positions," a dealer said.

There was a sell-off in government securities in early trade, but dealers said it was on expected lines and prices are not expected to fall much as cash-flush banks will buy at lower levels.

A CorpBank Securities dealer said, "The market would be moving at a similar pace over the next few days. Current bond prices would stay constant and, even if prices plummet, people would take positions in the market for valuation purposes."

"With the half-yearly closing round the corner, there will be no sharp rise in yields on government securities. As there are a couple of days left for the inflation data, the market will certainly improve and move upwards," said another public sector bank dealer.

Dealers estimate that prior to the month-end, the yield of the ten-year benchmark government paper would stay below 7 per cent.

Thereafter, yields could touch a range of 7.15-7.25 per cent levels.