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Indian bonds see biggest fall in two months; rupee gains on RBI

10 April 2017

Following the decision, the repo rate under the liquidity adjustment facility (LAF) remains unchanged at 6.25 per cent whereas the reverse repo rate, which is the rate at which RBI borrows money from the banks stands at 6 per cent.

Echoing similar view, Chanda Kochhar of ICICI Bank said, "a clear articulation on liquidity management is welcome as it would ensure stability in markets by enforcing the sanctity of the operating rate while addressing temporary liquidity imbalances". "Repo rate has not been changed because there is an upward risk to inflation that is being anticipated, while growth appears to be turning positive in RBI's view".

The benchmark 10-year bond yield rose 5 basis points to 6.74 per cent after the MPC decision, but the rupee strengthened to 64.84 from around 64.94 after the RBI kept rates on hold.

Crisil said that sharper-than-expected fall in inflation over the past few months has already started correcting as remonetisation gains currency and food price pressures could build anew if El Nino disrupts the south-west monsoon this year.

"The market was expecting a neutral to dovish stance but the policy was slightly hawkish", said Harish Agarwal, a fixed income trader with First Rand Bank. "Going forward, I expect favourable macroeconomic out-turns amid a neutral policy stance to create flexibility for lowering rates to spur growth impulses", said Rana Kapoor, MD & CEO, Yes Bank.

Patel further added that there is scope for transmission of rates.

"The key message from the RBI s monetary policy meeting was that it was committed to adhere to its stance of neutrality on liquidity and moved towards correcting distortions in interest rates", HDFC Bank's research team said in a note.

However, the six-member committee increased the reverse repo rate by 25 basis points to 6% in a bid to suck out excess liquidity from banks which has built up in deposits following the government's demonetization in November.

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But the RBI has long anxious about any sudden reversals of foreign flows, further making a change in rates unlikely on Thursday, analysts said.

All 52 economists surveyed by Bloomberg News had predicted that the rate would remain unchanged, largely because of an excess of liquidity in the banking system following a high-profile cash ban. It has projected inflation at 4.5 per cent for the first half of 2017-18 and 5 per cent for the second half.

According to the head of another private sector lender, the central bank may not change rates on April 6.

The consumer inflation rate climbed to 3.65 percent in February from a year earlier, picking up from its lowest levels in at least five years.

That could be a precursor to drain liquidity, with the RBI saying it could undertake measures including additional treasury bill sales, or outright bond sales via open market operations.

The GDP growth has been projected at 7.4% for the current fiscal, up from 6.7% in 2016-17. RBI further said that a prominent risk could emanate from managing the implementation of the allowances recommended by the 7th Central Pay Commission (CPC).

RBI wanted resolution of banks' stressed assets on a firm footing.

Indian bonds see biggest fall in two months; rupee gains on RBI