Edelweiss: Yields rise further pricing in a harsh stance at the policy review on 25th Jan

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Yields rise further pricing in a harsh stance at the policy review on 25th Jan
Government securities
 Sovereign bonds witnessed another round of selling today following comments
from the central bank governor regarding the soaring inflation. With the food price
inflation for the week ending Dec 25 touching 18.32%, the central bank is
expected to take stern measure at its review meeting to combat the inflation.
Sovereign yields, which got some respite from improvement in the system
liquidity, have risen between 18-25bps across maturities in the past three trading
sessions. The benchmark ten year bond has been the worst hit; with yield rising to
price in the illiquidity premium on the securities after it hit the notional
outstanding ceiling of INR 600bn.

 For the gilts auction to be held on 14th Jan, RBI choose the 7.17% 2015 bond,
8.13% 2022 bond and 8.30% 2040 bond. The central bank will auction INR 40bn
each of the 2015 & 2022 bond and INR 30bn of the 2040 bond. Swap rates also
edged higher on expectation of a minimum 25bps hike in policy rates. Banks
preferred to pay fixed across maturities with the one year swap rate rising to
7.30%, 10 bps higher compared to Friday’s close. The five year swap also closed 9
bps higher at 7.99%.
Non-SLR market
 State Bank of Travancore placed INR 2.25bn of 13th April maturity CD at 8.99%
and INR 2.50bn of one year CD at 9.59%. Federal Bank placed INR 1bn each of
April and June maturity CD at 9.15% and 9.40% respectively. IOC raised INR
10bn through issuance of March maturity CP at 7.77% while L&T Finance placed 3
month CP amounting to INR 1.25bn at 9.35%.
Money markets
 Spread between the overnight rates and the central banks repo rate has narrowed
significantly due to the improvement in the liquidity over the last week. The CBLO
rate continued to hover around the 6.20% level with healthy volumes while the
call rates closed at 6.30%. RBI injected INR 840bn through the LAF window
compared to INR 804bn on Friday.