Government security yields thawed on Tuesday as crude oil prices fell below $100 a barrel. Markets expect a 25 basis points repo rate hike from the RBI on October 7. Sandeep Agarwal said, “G-Sec yields softened by a couple of basis points as crude oil prices fell.” Bonds saw value buying.
Yields of government securities (G-Secs) thawed on Tuesday as crude oil prices dipped below the $100 a barrel mark and value buying emerged on bond markets discounting an expected 25 basis points (bps) repo rate hike announcement by the RBI’s rate setting panel, whose three-day meeting will conclude on October 7.
The softening of the G-Sec yields can be underscored by the fact that yield of the widely traded 10-year benchmark security (6.94 per cent GS 2036) dipped 2 bps to close at 7.19 per cent against the previous close of 7.21 per cent.
The bond market has pencilled in a 25 bps repo rate hike (from 5.25 per cent to 5.50 per cent). Barclays, in a report, said the rate hike is attuned to the current reality of elevated global oil prices and growth outperformance in the April-June quarter and still robust high-frequency indicators for July-August.
Sandeep Agarwal, Head - Fixed Income, Sundaram Mutual Fund, said, “G-Sec yields softened by a couple of basis points as crude oil prices fell and the cut-off at State Development Loan auctions came in marginally better than expected. This encouraged some value buying in bonds.”
Excess liquidity
On possible RBI measures to drain out excess liquidity from the banking system, he noted that if the objective is to move toward a tighter monetary policy, tighter liquidity conditions are needed as well.
“Rate hikes alone may not be effective if there is excessive liquidity in the banking system. If the market expects rates to rise but there is still abundant liquidity, the impact of the rate hike on money market conditions and monetary transmission can be limited,” Agarwal said.
He opined that the RBI may issue Cash Management bills (CMBs) to suck out surplus liquidity from the banking system.
Meanwhile, the rupee dipped to a two-month low, pressured by factors such as a strong Dollar index, rising US Treasury yields, importer and FPI demand.
The Indian currency closed at 96.42 per US Dollar, down 13 paise vis-a-vis previous close of 96.29. Intraday, the rupee tested a low of 96.45. But Dollar sales by banks, apparently at the RBI’s behest, is believed to have pulled back the currency from the low levels.