Trading remains cautious ahead of the policy meet, benchmark bond at 8.17%: Edelweiss

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Trading remains cautious ahead of the policy meet, benchmark bond at 8.17%
Government securities
 Sovereign yields edged slightly lower as traders remained cautious ahead of the
policy review meeting tomorrow. The ten year bond closed 1bp higher at 8.17%
while the 2022 bond closed 1bp higher at 8.22%.
 RBI released its report on Macroeconomic and Monetary Developments for the
third quarter today. The key highlights were :
o The reserve bank’s moves will not only be guided by inflation thrust,
but by also its effectiveness.
o Increase in its FY11 GDP growth target to 8.7% from 8.5% earlier
o Increase in its average inflation to 8.5% from 8.1% earlier.
o Curbing inflation to be the major policy aim in the near term.
 It is expected that the reserve bank will hike the repo and reverse repo rates by
25bps each tomorrow while leaving the cash reserve ratio constant at 6%.
Surprises to these can be on the hawkish side with a 50bps rate hike.
Non-SLR market
 PNB raised INR 3.25bn of 1yr CD at 9.845%. State Bank of Mysore raised INR
1.5bn of 1 month CD at 7.90%.
Money markets
 Swap curve flattened today owing to a sharp movement in the one year swap
rates as traders built paid positions ahead of the policy review. The one year swap
closed 5 bps higher at 7.465% while the five year swap ended 3bps higher at
8.07%. Overnight rates were slightly softer with the call rates closing at 6.63%
while the CBLO rates hovering around the central bank lending rate of 6.25. Banks
borrowed INR 1.13tn via the repo window.