Bonds recoup losses on low gilt supplies

The shockwaves of the Reserve Bank of India's surprise rate hike on Friday was felt strongly in the bond markets too. Benchmark bonds fell in early trade, but recovered most of thier losses on low gilt supplies and year-end deposit growth expectation, reports CNBC-TV18's Banking Editor Latha Venkatesh.

Bond prices fell today and the 10-year yield rose to 7.95% as against 7.83% on Friday. Yields are back to 7.87% on the lack of bond supplies. Dealers expect yields to rise only by end April.

In a surprise move after market hours on Friday, the central bank upped the repo rate by 25 bps to 5%. It also raised the reverse repo rate by 25 bps to 3.5%.

Both the repo and reverse repo are signalling rates. The signals are weak when liquidity is ample.

A repo rate hike can push up rates.  The move will only be successful if banks borrow from the central bank.

A reverse repo hike will actually help banks earn more. Banks will now earn 3.5% from the central bank instead of the earlier 3.25%.

Will banks now raise rates? All bankers that CNBC-TV18 spoke to said they aren't raising rates. However, those borrowing 90-day loans from banks may be hurt

The reverse repo hike has impacted short-end rates. These have now gone up.  The market suspects that banks are giving realty companies cheap short-term loans.

As credit picks up, realty companies are likely to face competition from manufacturing peers.