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Yields rise on hawkish RBI policy

The yields on benchmark ten year government bonds rose 3 basis points, as Reserve Bank signaled scope for future rate cuts is limited.

, ET Bureau|
Updated: Mar 19, 2013, 06.21 PM IST
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The yields on benchmark ten year government bonds rose 3 basis points, as Reserve Bank signaled scope for future rate cuts is limited, given the inflationary pressures on the economy along with concerns on high current account deficit.

The Reserve Bank of India cut the repo rate by a quarter percent to 7.50 per cent and kept the cash reserve ratio, pie of deposits banks keep with the RBI in the form of cash, unchanged.

Economic growth plunging to 4.5 per cent in the last quarter and Index of Industrial Production climbing 2.4 per cent in January were a justification for a cut in interest rates.

Inflation remains a spanner in the works. WPI for February was at 6.84 per cent, higher than the 6.62 per cent in January. But core inflation was at 3.8 per cent. Consumer prices, a measure the governor began to pay more attention to, continues climbing. CPI inflation rose to 10.9 per cent y-o-y in February from 10.8 per cent in January.

" Even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited," said the RBI in its note on its mid quarter policy review," "Elevated food prices, including pressures stemming from MSP increases, and the wedge between wholesale and retail inflation have adverse implications for inflation expectations. Risks on account of the CAD remain significant notwithstanding likely improvement in Q4 over an expected sharp deterioration in Q3 of 2012-13,"

But the fall in bond prices may be limited, as the Reserve Bank of India kept the cash reserve ratio unchanged and may manage the tightness in liqiudiity through open market operations of buy back of bonds.

Since February 9 the RBI has bought back bonds worth Rs 20,000 crore.

"The Reserve Bank will continue to actively manage liquidity through various instruments, including open market operations (OMO), so as to ensure adequate flow of credit to productive sectors of the economy," said the RBI in its mid quarter monetary policy review.
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