Bond yields edge lower as RBI signals ends of rate hike campaign

Pre RBI rate hike Scenario:

Bond yields edged lower in early Tuesday on hopes that the Reserve Bank of India may pause in its long drawn tightening cycle after a central bank report raised concerns about slowing economic growth. India's central bank, in its macroeconomic report released post trading hours on Monday, said inflation remains 'sticky' even though risks to growth have risen, while weakening investment imperils growth for the next fiscal year, complicating its policymaking task. The domestic debt market will be closed on Wednesday and Thursday for religious festivals.

However, some traders expect Reserve Bank of India to deliver one final interest rate increase on Tuesday at its policy review and then pause until the end of the fiscal year in March.

On the global front, US Treasuries prices edged lower on Monday as a stock market rally drew investors away from safe-haven U.S. government debt and traders trimmed prices before three Treasury note auctions this week. Meanwhile, Oil traded near the highest close in almost 12 weeks in New York as investors bet that signals of economic growth indicate fuel demand will increase. Brent’s premium to US prices narrowed for a third day.

The yields on 10-year benchmark 7.80% - 2021 bonds 2021 bonds were trading at 8.74%, sharply down from Monday's close of 8.82%, as the central bank's macroeconomic report after market hours on Monday reignited hopes of a pause in the policy review later in the day.  

The benchmark five-year interest rate swaps were trading at 7.41% from 7.44% previously.

The Government of India has announced the sale of Four dated securities for  Rs 15,000 crore on October 28, 2011, which includes, (i) “7.99 percent Government Stock 2017” for a notified amount of  Rs 4,000 crore (nominal), (ii) “8.13 percent Government Stock 2022” for a notified amount of  Rs 6,000 crore (nominal) (iii) “8.28 percent Government Stock 2027” for a notified amount of  Rs 2,000 crore (nominal) and (iv) “8.30 percent Government Stock 2040” for a notified amount of  Rs 3,000 crore (nominal) through price based auctions. The auctions will be conducted using uniform price method.

The Reserve Bank of India has announced the auction of 91-day and 182-day Government of India Treasury Bills for notified amount of Rs 4,000 crore each. The auction will be conducted on October 25, 2011 using 'Multiple Price Auction' method.

Post RBI rate hike Scenario:

The Reserve Bank of India in its second quarterly monetary Policy 2011-12 chose to continue with its tight monetary stance and raised interest rates by 25 basis points, 13th time since March, 2010, to tame inflation, even as it lowered the growth target to 7.6 per cent for the current fiscal. Post to the rate hike, repo rate (rate at which RBI lends to banks) stood at 8.50%. Accordingly, the Reverse repo rate stood adjusted at 7.5%.

The yields on 10-year benchmark 7.80% - 2021 bonds were trading at 8.70%, sharply down from Monday's close of 8.82%, after the central bank gave a strong signal it may be finished with its current tightening cycle.

The benchmark five-year interest rate swaps were trading at 7.30% from 7.44% previously.