Indian bond yields, swaps up

Indian bond yields and swap rates rose on Friday after the central bank raised its key lending rate and stuck to its hawkish stance despite signs of growth cooling amid an uncertain global environment. The Reserve Bank of India (RBI) raised interest rates by an expected 25 basis points, its 12th increase in 18 months, and said it would persist with its anti-inflationary policy stance.
"A premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance," it said in a statement. The 10-year benchmark bond yield climbed 4 basis points and shares trimmed gains sharply immediately after the policy, but soon recouped the ground. "While the policy action is in line with expectation, the statement is more hawkish than expected," said Anubhuti Sahay, Economist, Standard Chartered Bank.
At 3:10 pm (0940 GMT), the 10-year benchmark bond yield was at 8.36 percent, off 8.38 percent struck after the rate increase was announced. It had closed at 8.33 percent on Thursday. The main 30-share BSE index was up 0.23 percent after trimming gains to 0.1 percent from more than 1 percent beforehand. A global return to risk after co-ordinated action by five major central banks to add liquidity to a European banking system helped boost local shares.
There were some in the market who still expect global economic headwinds and slowing domestic growth to halt the tightening cycle. "Sentiment in equity markets should improve on evident signs of peaking of rate cycle," said Navneet Munot, chief investment officer at SBI Mutual Fund.
The partially convertible rupee was at 47.3900/4050 per dollar, stronger than Thursday's close of 47.545/555, after moving in a 47.3550-47.5200 band. The benchmark five-year swap rate was at 6.88 percent, its highest since September 7. On Thursday, it had ended at 6.79 percent. The one-year rate was up 21 basis points at 7.94 percent, a level last seen on July 25.
"The short-term swap rates will rise, but whether the RBI will continue to pursue its anti-inflation stance will depend on how global developments shape up," said Jayesh Mehta, managing director and country treasurer, Bank of America Merrill Lynch. Annual inflation in August climbed to its highest in more than a year as prices of food and manufactured goods surged, while industrial output growth had slumped to 3.3 percent in July, its weakest annual pace in nearly two years.