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ShareThe Reserve Bank of India (RBI) has also killed any hopes of a hike in held to maturity (HTM) bonds holding limit of banks by hiking the statutory liquidity ratio (SLR) limit by a percentage point to 25%.
In doing, it stated that a HTM hike was not required at the current juncture.
The hike in SLR does not have any positive impact in terms of demand for bonds as the banking system is currently sitting at an SLR of 27.6%.
The RBI has clearly spelt out the policy stance going forward. Price stability is the primary objective of the RBI given that the Wholesale Price Index forecast for end of fiscal 2009-10 has been raised from 5% to 6.5%.
The RBI has talked about asset price bubbles in the form of rising equity markets, rising property prices and higher commodity prices.
The non-conventional policy measures of higher export refinance limit have been reduced while special repo facilities for banks, mutual funds and non banking finance companies have been withdrawn.
The shift of policy stance from pro growth to price stability coupled with withdrawal of non conventional accommodative measures are clear signs of policy rate hikes in the near future.
The bond markets were largely expecting a status quo on policy rates. The ten year benchmark yield dropped from pre policy levels of 7.40% levels to 7.30% levels.
The SLR hike came as a sentiment booster but in fact it has removed any chances of a HTM hike.
Bond yields will now move on factors such as global commodity prices domestic inflation numbers, government finances etc. Bond yields are expected to be range bound with an upward bias.
Credit spreads are likely to trend higher as issuers come into the market aggressively before policy rates are hiked. Five- and ten-year AAA spreads, which are at over one-year lows at 110 bps and 130 bps, respectively.
(Disclaimer : The author is head - fixed income, IDFC Mutual Fund and views are personal)
