Bond yields surge to 3-year high
India’s benchmark 10-year bond yield ended trading at 7.4996%, up 4 bps
MUMBAI: India’s benchmark 10-year bond yield rose to its highest levels since March 2019 on Monday as investors prepared for the central bank to raise interest rates again later this week.
The Reserve Bank of India (RBI) had raised its main lending rate by 40 basis points, off record lows, in a surprise move on May 4 to contain rising inflation.
India’s benchmark 10-year bond yield ended trading at 7.4996%, up 4 basis points from its previous close. The yield rose as high as 7.5143%, its highest since March 20, 2019.
“The weight of the RBI’s policy considerations has shifted away from economic support and towards taming inflation, suggesting that we should see a relatively fast pace of rate hikes ahead,” Eugene Leow and Duncan Tan, strategists at DBS Bank said in a note.
“And with inflation proving to be quite sticky, the risks around RBI’s hike path are likely tilted to the upside.”
A Reuters poll showed that the central bank will be likely to concentrate interest rate hikes over the coming months in a relatively short tightening cycle, to reach its terminal level early next year.
Retail prices in April were 7.79% higher than a year earlier, exceeding the RBI’s tolerance band for inflation of 2% to 6% for a fourth month in a row. Inflation is expected to stay high in the near future.
DBS strategists said the overnight indexed swap market was already pricing in front-loaded rate increases with a terminal rate hike of around 7.15-7.20% which is almost a 100 basis points higher than their house forecast.
India’s 5-year OIS rate was being quoted at 7.08%, 6 bps above its previous close.
Measures to tighten liquidity are expected to accompany a rate rise on Wednesday, adding upward pressure to bond yields and increasing the need for central bank measures to support government borrowing.
Traders said the uptick in global crude oil prices was also weighing on bonds as it was likely to keep up the pressure on imported inflation.
Oil prices hit $120 a barrel on Monday after Saudi Arabia raised crude prices for July and amid doubts that an increased Opec+ monthly output target will help to ease tight supply.
The RBI’s Monetary Policy Committee (MPC) on Monday began its three-day deliberation. RBI governor Shaktikanta Das will announce the decision of the MPC after deliberations on Wednesday.
Das has already indicated that there may another hike in the repo rate, though he refrained from quantifying it.
Market experts are estimating a bigger hike in interest rate as consumer price index (CPI) based retail inflation, which the RBI factors in while arriving at its monetary policy, galloped for a seventh straight month to touch an 8-year high of 7.79% in April. Inflation is rising mainly on account of surging commodity prices, including fuel. The ongoing Russia-Ukraine war has further pushed up commodity prices across the globe.
The wholesale price-based inflation has remained in double digits for 13 months and touched a record high of 15.08% in April.
Meanwhile, equity indices stayed on the backfoot for the second straight session on Monday as investors remained cautious amid unabated selling by foreign funds and elevated crude oil prices.
After tumbling over 450 points in early trade, the 30-share BSE Sensex clawed back some lost ground to end at 55,675.32, down 93.91 points or 0.17%. The broader NSE Nifty dipped 14.75 points or 0.09% to finish at 16,569.55.