Bond yields shoot up on monetary policy status quo, but rollback of CRR hike to infuse more liquidity in the system, pressurise bond prices
All six members of the Monetary Policy Committee (MPC) preferred to hold rates by keeping the repo rate unchanged at 6.25%, saying that there are upside risks to inflation from food and the probability of oil price hike with the Organization for Petroleum Exporting Countries (OPEC) deciding to cut production. Yields shot up on the surprise status quo, but bankers say it was more of a knee-jerk reaction.
N S Venkatesh, executive director, Lakshmi Vilas Bank said, “The markets were front-running a 0.25% to 0.50% rate cut. So, when they saw a pause it was a knee-jerk reaction. But the abundant liquidity and the meager demand for credit will bring down the yields.”
Some say that the status quo in rates was maintained to show that the pain in the economy is only transitory and a stimulus is not needed to kickstart economic activity.
Abheek Barua, chief economist at HDFC Bank said, “It is possible that a rate cut could have strengthened apprehensions of a sharp slowdown in the economy. Thus, instead of explicitly acknowledging a marked slowdown, RBI chose to play growth concerns down by keeping the policy rate on hold. The RBI’s bet at this stage seems to be to convince the market that growth pain is transitory while there is enough demand in the system to make it fret over inflation risks.”
Barua calls this strategy “unconventional if not bold”, and raises doubts over its viability. But bankers expect the yields to soften as the liquidity will keep the cost of money low.
A senior public sector banker in charge of treasury said, “The market had priced in a 0.25 % cut in rates but when that did not come through the yields went up by the same proportion. But the surplus liquidity with the roll back of the 100% hike in cash reserve ratio (CRR) is expected to cool yields in the next few days.”
Melwyn Rego, managing director and chief executive officer, Bank of India said the bond market obviously reacted negatively post policy with the benchmark 10-year paper rising 0.15 to 0.20%.
“However, inadequate deployment avenues would lead to range bound movement in yields. Overall, the policy had a cautious tone highlighting inflation risks due to unfavourable base effect and rise in crude and commodity prices.”
Others believe that the hawkish stance of policy will weigh on the yields for a while. Keeping inflation outlook unchanged at 5% by the fourth quarter of FY17 with some upside risks, will tighten the rates.
Even if the incremental CRR is lifted, part of the Rs 3.2 lakh crore will be sucked out by the market stabilisation scheme (MSS) bonds which amount to Rs 60,000 crore.
DIVERGENT VIEWS
- Some say that the status quo in rates was maintained to show that the pain in the economy is only transitory, and a stimulus is not needed to kickstart economic activity
- Others believe that the hawkish stance of the policy will weigh on the yields for a while
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