Edelweiss: Sentiment takes hit on the rising inflation; rate hike on the cards

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Sentiment takes hit on the rising inflation; rate hike on the cards
Government securities
 Sovereign bond yields edged higher as a sharp rise in the food articles inflation
heightened the possibility of a rate hike by the RBI at its third quarter policy
review meeting on 25th Jan. Food articles rose to 18.32% for the week ended Dec
25 from 14.44% a week ago while the primary articles inflation hit a seven month
high of 20.20% compared to 17.24% in the prior week. A scheduled supply from
the government on Friday also prompted investors to cut their holdings.

 Swap rates saw sharp rises across maturities as banks preferred to pay fixed
owing to the persistently rising inflation numbers. Swaps rates rose in the range of
15-20bps pricing in the possibility of a rate hike. One year swap rate rose 14bps to
7.16% while the five year swap closed 19bps higher at 7.90%.
Non-SLR market
 CD issuances remained muted as rates rose marginally post the release of the food
inflation data. SBBJ placed INR 4bn of 15th May maturity CD at 8.95% while
Canara Bank placed INR 2.25bn of 8th April maturity CD at 8.77%. IDBI Bank
placed INR 3bn of March maturity CD at 7.50%. BPCL placed INR 10bn of March
maturity CP at 7.70%.
Money markets
 Banks dependence on the LAF window receded further to INR 608bn compared to
INR 621bn on Wednesday. Government spending, buybacks and spaced borrowing
since mid December has help ease the strain on the liquidity which saw the LAF
dependence rise to INR 1.7trn on 22nd Dec. Call rates closed at 6.32% while the
CBLO rates closed unchanged at 6.20%. Overnight market volumes continued to
be robust with the CBLO window clocking in volume of INR 770bn today.