The Hindu Business Line : Bond prices drop by as much as Rs 2

MUMBAI: THE bond market saw turmoil on Tuesday as prices plummeted up to Rs 2 on certain maturities, with yields touching two-year highs, post announcement of repo rate hike in the mid-term review of the Reserve Bank of India's annual policy statement.

Repo rate hiked by 25 basis points to 4.75 per cent signalled the central bank's acceptance of rising interest rates, traders said.

The 11-year benchmark 7.38 per cent 2015 paper that was trading at Rs 105.25 before the announcement fell by 200 paise to Rs 103.25. Yield on the paper rose to as high as 6.94 per cent. Yield on the 10-year benchmark rose to as high as 6.85 per cent during the day.

Prices recovered by nearly a rupee towards the end of trading hours as statements from the RBI Deputy Governor, Mr Rakesh Mohan, soothed sentiments.

Statements portraying repo rate hike as a temporary measure with indications of discontinuing MSS if required improved the prices.

The yield on the actively traded 11-year benchmark closed at 6.78 per cent at Rs 104.50. The 10-year paper ended five basis points lower at 6.80 per cent.

This recovery provided the bond market with some relief as the participants looked forward to a range-bound market, with intra-day trading expected to be in a range, said a trader.

Meanwhile, call rates eased off towards the end of trading hours to 4.55-4.60 per cent after touching 4.80 per cent levels earlier.

Under the LAF window, the RBI mopped up Rs 4,545 crore in the one-day repo auction through 13 bids and absorbed Rs 100 crore by a sole bid in the seven-day repo auction.

In the CBLO market, 141 trades worth Rs 5,955.45 crore were transacted.

The rupee ended marginally weaker at 45.6850/6900 against the dollar on the back of oil-related demand for dollars from importers. The currency had finished at 45.6350/6450 in the previous closing session.

Foreign inflows subsided and demand for greenbacks from all quarters was seen, said a dealer. In the early morning trades, the rupee touched a high of 45.61 per dollar before weakening towards close.

The forwards market saw substantial rise of nearly 25 basis points as premiums moved higher, post announcement of a repo rate hike. The six-month forward closed at 2.77 per cent (2.60 per cent) while the 12-month forward finished at 2.25 per cent (2.05 per cent).

Traders said that the premia were likely to move higher as corporate hedging also would become costlier. - - Our Bureau