RBI’s ‘Baby Steps’ Instead of ‘Big Leap’ Favoured the Bond Market

Highlights:

• RBI announced policy rate hikes; Repo, Reverse Repo and CRR hiked to 5.25 per cent, 3.75 per cent and 6 per cent respectively, up by 25 bps

• RBI followed “baby steps” instead of “big leap” as a part of unwinding accommodative measures

• RBI’s M3 growth, Deposit Growth and Credit off-take projected at 17 per cent, 18 per cent and 20 per cent respectively for Fiscal Year 2010-11

• CRR hike of 25 bps drained out Rs. 12,500 crore from the system; liquidity still abundant with weekly average of above Rs. 48,000 crore

• Bond Markets reacted positively to RBI announcements; Yields moved down. Benchmark G-Sec 6.35% 2020 settled at 8.06 per cent or Rs. 88.64; Introduction of new security G-Sec 8.20% 2022

• Bond Markets remained buoyant throughout the week following the RBI’s announcement of policy rate hikes.

• Inflationary pressures (food including non-food) and overseas cues such as US Treasury Yields and Crude Oil Prices may also influence domestic bond yields

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