Bond mkt hints atsteep rate hikes
Yield on benchmark 10-year government securities breaches 7.5% mark after 3 yrs
MUMBAI: Yield on the 10-year sovereign bond breached the 7.5% mark for the first time in more than three years as traders priced in a more aggressive pace of interest rate hikes ahead of the central bank’s monetary policy committee’s announcement on Wednesday.
The benchmark 10-year bond yield ended trading on Monday at 7.498%, up 4 basis points (bps) from its previous close. Yield rose as high as 7.5004% during intraday trading. Last week, the yield on the one-year T-bill hit 6.08% at the auction, the highest level since July 2019, compared to 4.81% in April.
Rising yields indicate that bond traders expect the the Reserve Bank of India (RBI) to take the repo rate to 6.5-7% by
March 2023, higher than economists’ projection of 6-6.25%. Economists expect the RBI to hike policy rates by 50 bps on June 8. “The market is expecting a higher terminal repo rate. As a result, it is pushing the curve higher. The 10-year yield was up 10-15 bps in the past week. That means the market is expecting the curve to shift higher. In the same week, the one-year T-bill cut-off was at 6%. So, Overnight Index Swap (OIS) market is predicting the terminal repo rate would be 6.5-7%,” a debt fund manager said on condition of anonymity.
With crude touching $120 per barrel, the bond market is expecting consumer inflation to quicken to 7% in FY23, faster than the RBI’S forecast of 5.7% and economists’ expectation of above 6%. India’s retail inflation surged to an eight-year high of 7.79% in April, well above average market expectations.
Therefore, traders are expecting more aggressive rate hikes from the RBI, which is pushing yields higher. As a result, the yield on 10-year G-sec has already gone up by 20 bps over the past 10 days.
At the off-cycle meeting in May, the RBI’S rate-setting panel raised the repo rate by 40 bps to 4.4% and the cash reserve ratio (CRR), or the share of deposits lenders must park with the central bank as reserves, by 50 bps to 4%, draining ₹87,000 crore of liquidity out of the system, as inflation remained above the RBI’S 6% upper tolerance limit since January.
According to a Mint poll, five out of 10 economists expected the RBI to raise the repo rate from the current 4.4% to 4.9%, while the rest expect a 35-40 bps rate hike to 4.75-4.8%. Half of those polled also expect a 25-50 bps hike in CRR.
Banks have already raised repo-linked and the marginal cost of funds-based lending rates (MCLR) since May, leading to an increase in borrowing costs for retail and corporate customers. The June policy will be keenly watched from the point of view of rate action and the RBI’S thoughts on growth and inflation, analysts said. “As potential monetary policy action is dovetailed to its projections on growth and inflation, the markets will be looking for some direction to be provided by the central bank on both these indicators,” said Madan Sabnavis, chief economist, Bank of Baroda.
According to Pankaj Pathak, fund manager-fixed income, Quantum AMC, “The bond market is already positioned for front-loaded rate hikes. The broader market expectation is that RBI will hike by 40-50 bps in the June meeting. Any smaller rate hike will be a positive surprise, and short-term bond yields may soften marginally.”
Meanwhile, the rupee depreciated to a record low of 77.73 against the dollar in the past fortnight but has found support at the 77.5 level.
Press Trust of India
NEW DELHI: Shares of Life Insurance Corporation of India (LIC) continued to fall for the fifth day running on Monday and further declined by nearly 3%, dragging its market valuation below the ₹5 lakh crore-mark.
The stock fell by 2.86% to end at ₹777.40 apiece on BSE. During the day, it tanked 3.10% to ₹775.40—its lowest level since listing last month. On NSE, it declined by 2.96% to finish at ₹776.50 apiece. The company’s market valuation stood at ₹4,91,705.32 crore on BSE.
The stock has been falling for the past five days, declining 7.12% during this time.
On May 17, the country’s largest insurer made a lacklustre debut on stock exchanges, listing at over 8% discount after the IPO.