The RBI followed the hike in benchmark rates of 25bps by increasing the size of a scheduled bond auction to be held this week.
Shorting SBI futures as a proxy move may be a good idea.
MUMBAI: The Reserve Bank of India (RBI) followed the hike in benchmark rates of 25bps by increasing the size of a scheduled bond auction to be held this week. The amount of the auction as per the auction calendar was Rs 5,000 crore and the auction announced for June 22, 2006, is for Rs 9,000 crore.
The rate hike followed by the increase in size of the bond auction sends out strong signals to the market that the RBI will do all it can to fight inflationary trends and maintain financial market stability.
The auction size was increased to bring down the liquidity, as measured by the bids in the LAF (liquidity adjustment facility) auction of the RBI, in the system, which currently stands at around Rs 40,000 crore.
RBI is beginning to feel that they have been behind the curve in fighting inflation and the stepped up monetary measures is expected to take them ahead of the curve.
Bond markets are expected to tumble next week, as players sell their bond holdings in the face of rising interest rates and decreasing liquidity. The outlook for the auction is gloomy, with the increased size unnerving market players.
The markets will test the RBI initially in the T-bill auction to be held one day prior to the bond auction, and if the central bank clears the tail, then bids for the bond auction will be way up the yield curve.
One can expect the benchmark ten year Government of India bond to test 8% levels in the medium term.
The ten-year gilt yield is trading at 7.90%, levels up from 7.80% levels before the auction announcement. The rise in yields hits banks directly on their portfolios as they have to maintain 25% statutory liquidity ratio (SLR) in the form of government of India bonds. While, the portfolios do not have be marked to market, the implicit impact of rise in bond yields on their portfolios are negative.
The sharp fall in stocks over the last one month, with the Sensex falling by over 20% has hit banks investment portfolios in shares. Banks have been looking to shore up trading revenues through trading in equity and the fall in equities will reflect in their first-quarter results for 2006-07. The fallout of these two factors will impact bank stocks in the short run.
State Bank of India is the one of the most actively traded derivative contracts in the market.
Sell near month SBI futures for short-terms gains with a stop-loss at 5%. The futures price is at Rs 750 levels.
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