Reserve Bank of India’s surprise Rate hike (25bps each for repo and reverse repo) caught the market off-guard, even as the past week’s buying in government bonds indicated a distinct comfort on the part of market participants most of whom anticipated the action at the time of the April policy – scheduled on April 20, 2010. We would expect the impact on the respective fixed income segments as below.
Sovereign bonds – with most of the action concentrated in the 2016 and the benchmark 2020 bonds, we would expect the belly of the curve to steepen and the 2s10s spread to harden as market prices in the distinctly emerging hawkishness on interest rates from the central bank.
Short-term rates – the money market rates in the overnight segment would remain benign (expected to hover at or below the now higher lower end of the policy rate band i.e. the reverse repo of 3.50%) till the end of FY10 as liquidity is expected to remain comfortable.
Long-term rates on corporate bonds too are expected to response to the over-riding bearishness in the benchmark government bond segment. The 10-year corporate spread that has been contained well below the 100 mark is expected to widen in a run-up to the April policy even as the dismal investor interest and the preferred supplies for the longer maturity keep an upside strain on the yields
The overnight index swap segment that reported an aggressive switch to the ‘receiving positions’ in the past week as the curve eased by 15-25bps is expected to reverse yet again as the market players price in the mounting tightening pressures from the central bank believed to be running behind the curve.