MUMBAI: The Reserve Bank of India's surprise move to cut its cash reserve ratio after the market close on Friday is likely to hit 10-year federal bond yields only moderately when trading resumes next week.
The 75 basis point cut in the CRR by the central bank came on a day when the benchmark bond yield had settled 4 basis points higher to near a six week high of 8.28 percent.
Traders expect that yield to come down only by about two to three basis points on Monday as markets had already anticipated a cut in the CRR of at least 50 bps, though they had expected the action to come in the RBI's policy meeting due next week.
Traders said the RBI was now unlikely to announce any significant further action, and markets are expected to shift their attention to the government budget later this month, which is expected to include higher borrowing plans for the next fiscal year.
"I attribute a low probability to a rate cut in March and with the CRR cut, now further OMOs (open market operation) are also unlikely and combining these two factors, I don't expect the 10-year bond yield to fall much," said Anindya Dasgupta, a treasurer at Barclays Capital in Mumbai.
The one-year swap rate is likely to fall more sharply, to around 8 percent, from 8.18 percent at Friday's close.
That is because the rate is more sensitive to changes in liquidity as it tracks the overnight rates.
The benchmark five-year overnight indexed swap (OIS) rate settled 7 basis points higher at 7.48 percent.
The gains in bond yields before the RBI's surprise announcement had been driven by earlier comments from RBI Governor Duvvuri Subbarao about the need to reduce banks' holdings of government debt.
That had sparked speculation that the RBI would announce a cut in the statutory liquidity ratio (SLR) in its policy review due next Thursday, which could have hit demand for government securities, according to traders.
Such a move is now considered unlikely, however, after the RBI's announcement on the cash reserve ratio.
The RBI also said on Friday it bought 115.54 billion rupees of bonds through an open market operation. The bank had said it would buy up to 150 billion rupees ($3 billion) of bonds.
Investors did not react to a federal bond auction, as the cutoffs were largely in line with estimates. The RBI sold 120 billion rupees of bonds and set a cut-off price of 103.42 rupees, for a yield 8.2660 percent on the 10-year benchmark bond.
Volumes in the secondary market was 72.65 billion rupees, marginally higher than Wednesday's 67.95 billion rupees, but below the average over the previous five sessions of 96.62 billion rupees.
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