RBI acts on Repo and Reverse Repo, a surprise for all

Indian Debt Markets are increasingly more on middle-of-the-road as traders awaited the borrowing calendar from RBI anxiously due on Mar 29, 2010. The inflation as measured by Wholesale Price Index (WPI) already reached to 9.89 per cent on month-on-month basis surpassing the RBI projection of 8.5 per cent. This has put policy makers to analyze all the monetary scenarios before announcing a roll back in accommodative measures. The Deputy Governor K C Chakraborty commented that the RBI might take measures anytime before the RBI policy meet on April 20 to tame the inflation which had shifted from Supply Side constraints to Non-food inflation constraints. An increase in non-food i.e. manufacturing inflation coupled with high IIP numbers (already in double digits nearing 16 per cent for two times in a row) prompted the RBI to announce a hike in policy rates, the first step seen in unwinding the stimulus packages and normalizing policy rates to tame the high inflation. The RBI hiked the Repo Rate and Reverse Repo Rate under the Liquidity Adjustment Facility (LAF) to 5 per cent and 3.5 per cent respectively with immediate effect, a hike of 25 bps over its last figures. Repo Rate is the rate at which the banks borrow money from RBI for meeting its short term liabilities and Reverse Repo Rate is the rate at which the banks put their surplus/money with RBI. This unexpected move may increase the sell offs by traders and yields may move northwards.

The inflationary pressures were of high concern as evident from RBI statement “Notwithstanding some moderation in recent weeks, food prices remain at elevated levels. In fact, consumer price inflation, as measured by various consumer price indices, has accentuated further. The acceleration in the prices of non-food manufactured goods and fuel items in recent months has been of particular concern.”  

The 10-year paper benchmark 6.35 % 2020 G Sec cooled off to 7.82 per cent, down by 18 bps week on week while the 5-year paper 7.32% 2014 saw yields slipping to 7.18 per cent, down by 13 bps. The cut-off price for the 91-Day T Bill was seen at Rs. 98.91 or at 4.42 per cent compared to previous cut off of 4.34 per cent. There was also a pressure seen on Corporate Bonds. On the shorter end of yield curve, the spread over G Sec in one-year category rose to 142 bps as on Mar 19, 2010, up by 16 bps. In 10-year category, the spread rose to 90 bps, up by 17 bps. The 10-year AAA bond traded at 8.88 per cent vis-à-vis 8.90 per cent as observed in last week.