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Repo slash pierces gilt yields

Mumbai, Aug. 26: A 10-year government security maturing in 2013 was today fetching 5.22 per cent, the lowest rate that has ever been recorded on the instrument.

The slide was sparked by the Reserve Bank’s cut in the repo rate over the weekend and hopes that it would be the precursor to a reduction in bank rate and cash reserve ratio.

A 10-year government bond is reckoned as a benchmark for how interest rates are moving in the long term. Yields and prices move in opposite directions.

The bond yield plunged to 5.22 per cent this afternoon, before edging up to 5.25 per cent at the close of trading. Rates have gone into a free-fall in reaction to the cut in repo rate to 4.5 per cent, except on Monday, when jitters set off by the blast skewed market behaviour.

Returns on the 10-year government security have fallen over 30 basis points since the cut in the short-term benchmark rate. Today’s slide could prod banks to take a re-look at their deposit rates. Bank of Baroda hinted deposit rates could fall 0.25 per cent from September 1.

Perceptions differ on where the yields are headed. Since a cut in bank rate or a cash reserve ratio can only come through in October’s monetary and credit policy, some are of the opinion that yields should continue heading south, though their fall will not be substantial.

Others feel the 10-year rate will hit a low of 5.15 per cent, but settle around 5.25 per cent. Analysts say while banks are swamped with cash, a government borrowing scheduled to raise Rs 9000 crore next month, and quarterly tax payments, will soak up some of the funds.

Rupee hardens

The rupee rallied to 45.87 against the dollar in a gain of four paise over Monday’s finish of 45.92. Earlier, it hit an intra-day peak of 45.86 after opening at 45.89.

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