Bond yields have hardened since the previous credit policy in August when the central bank reduced the repo rate by 25 basis points to 6%. (Reuters)
A day ahead of the policy, the benchmark yield closed one basis point lower at 6.65% as the market anticipates the Reserve Bank of India (RBI) to hold rates while signalling a dovish tone. Jayesh Mehta, managing director and country treasurer at Bank of America Merrill Lynch stated that the RBI is unlikely to cut rates this time but said a dovish tone could be expected.
“We expect the RBI to hold the rates while giving a dovish stance on Wednesday’s policy. The tone of the policy might also have room for being accommodative going forward,” Mehta points out.
Bond yields have hardened since the previous credit policy in August when the central bank reduced the repo rate by 25 basis points to 6%. During this period, the benchmark yield rose 19 basis points to 6.65%.
Badrish Kulhalli, head of fixed income at HDFC Life points out market participants are keenly watching for the RBI-MPC’s focus on the growth versus inflation trade-off.
“If the slow growth is accorded more importance accompanied by the reiteration that the inflation expectation of 4%-4.5% will not be breached this fiscal, we may see the bond yields come down. Otherwise, a sole focus on inflation will reduce expectations of a rate cut in December,” Kulhalli observed.
The weighted average rate of the interbank call money on Tuesday stood at 5.85%. Call money rates have consistently remained below the repo even as the banking system is flush with liquidity.
“Call money rates are trending lower than the repo because of a known fact of excessive systemic liquidity which currently stands over R2 lakh crore. Till the time the surplus liquidity is drained out, we will continue to see the interbank lending rates below the repo rate,” Kulhalli said.
