Bond yields rise to three-month high as market rules out more rate cuts

Government bond yields rose on Friday after retail inflation spiked in July, ruling out expectations of more accommodation from the Reserve Bank of India (RBI). Traders expect the RBI to announce an open market operation (OMO) or a special OMO to address the nervousness in the bond market.

The yield on the 5.79 per cent bond due in 2030 rose five basis points to 5.95 per cent on Friday. The 10year bond yield has risen to the highest since May this year as the July Consumer Price Index (CPI) inflation climbed to 6.93 per against the expectations of 6.25 per cent. Economists feel that we may be nearing an end to the RBI rate cut cycle.

Yields and bond prices move in opposite direction. The yields have already been on the rise since the RBI kept rates on hold at a policy review last week amidst inflationary pressures against wider expectations of a rate cut.

However, the higher retail inflation print was primarily on account of higher food prices and some believe that a normal monsoon and a good kharif harvest could help the inflation cool off in the September-March period.

“Retail inflation breaching MPC’s upper band of 6 per cent in seven out of last eight months makes the task of MPC difficult. We believe the MPC will watch the inflation trajectory very carefully before taking the decision of further rate cuts,” said Devendra Kumar Pant, chief economist at India Ratings.”

“We maintain further scope for upto 50 bps cut in the current cycle but with the MPC’s desire for statistical reflection of durably low inflation, near-term cuts may be ruled out. Irrespective the policy stance, the RBI’s yield curve management in the form of outright OMOs and operation twist will continue,” said Madhavi Arora, economist at Edelweiss.

Retail inflation has breached the RBI’s upper tolerance limit of six per cent for four consecutive months and seven out of eight months.