Mumbai : Yields on 10-year sovereign bonds breached the 7.5% mark for the first time in more than three years as traders pushed prices further aggressively in interest rates ahead of the central bank’s Monetary Policy Committee announcement on Wednesday.
The benchmark 10-year bond yield was trading at 7.498%, up 4 basis points (bps) from its previous close on Monday. The yield rose to 7.5004% during intraday trading. Last week, the yield on one-year T-bills hit 6.08% at auction, the highest level since July 2019, as against 4.81% in April.
Rising yields indicate that bond traders expect the RBI to take the repo rate to 6.5-7% by March 2023, higher than economists’ estimate of 6-6.25%. Economists expect the Reserve Bank of India (RBI) to hike policy rates by 50 bps on June 8.
“The market is expecting higher terminal repo rate. As a result, it is further elevating the curve. Last week, the 10-year yield had increased by 10-15 bps. This means that the market is expecting the curve to move higher. In the same week, the one-year T-bill cut-off was 6%. Hence, the overnight index swap (OIS) market is predicting that the terminal repo rate will be 6.5-7%,” said a debt fund manager on the condition of anonymity.
With crude oil touching $120 a barrel, the bond market is expecting consumer inflation to hit 7% in FY13, faster than the RBI’s forecast of 5.7% and above economists’ expectation of 6% . India’s retail inflation rose to an eight-year high of 7.79% in April, well above market average expectations.
Therefore, traders expect more aggressive rate hikes from RBI, which is pushing the yield higher. As a result, the return on the 10-year G-Sec has already risen 20 basis points over the past 10 days.
In an off-cycle meeting in May, the central bank’s rate-setting panel raised the repo rate by 40 basis points to 4.4% and the cash reserve ratio (CRR), or the share of deposit lenders, as a reserve with the central bank. needed. , 50 basis points to 4%, drainage 87,000 crore liquidity out of the system, as inflation remained above RBI’s upper tolerance limit of 6% since January.
According to a Mint poll, five out of 10 economists expected the RBI to increase the repo rate to 4.9% from the current 4.4%, while the rest 35-40 bps were expecting a hike in the rate to 4.75-4.8%. Half of the voters also expect an increase of 25-50 bps in the CRR.
Banks have already raised repo-linked and marginal cost of funds-based lending rates (MCLR) from May, thereby increasing the cost of borrowing for retail and corporate customers. Analysts said the June policy will be viewed from the perspective of rate action and RBI’s views on growth and inflation. “As the likely monetary policy action is in line with its projections on growth and inflation, the market will look 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 poised for a front-loaded rate hike. The broad market expectation is that the RBI will hike by 40-50 bps in the June meeting. Any small rate hike would be a positive surprise, and short-term bond yields could soften marginally.”
Meanwhile, the rupee fell to a record low of 77.73 against the dollar in the past fortnight, but found support at 77.5 levels. “Higher domestic inflation, FPI outflows, risks to the domestic growth outlook and a widening trade deficit continue to weigh on the rupee. We expect the Indian currency to trade in the range of 77.5- 78/$ with depreciation bias in the next fortnight, Bank of Baroda said in a report on Monday.