Bond yields at 18-month high on RBI’s taper, market rally

In what is perceived as a tapping signal, the RBI suspended the bond buying programme, followed by the G-Sec Acquisition Program (G-SAP). ₹2.37 trillion purchases in the first half of FY22 and ₹3.1 trillion in FY21.

The Monetary Policy Committee (MPC) kept its policy rates and accommodative stance unchanged, but did not announce any new set of liquidity-boosting measures for the first time since the start of the COVID-19 pandemic. It also announced greater absorption of liquidity under the upcoming Variable Rate Reverse Repo Operation (VRRR).

According to Radhika Rao, Senior Economist, DBS, even though the G-SAP program has been discontinued, it is with the caveat that the volatile movement will attract the hand of the central bank as yield movements are still seen as a ‘public good’. is seen.

“Compared to some regional higher yields, India’s recovery from the delta hit has been strong, leaving room for RBI to tolerate higher rates/yields in the coming months as oil prices cut. Rao said the normal 10-year yield has risen 25 basis points (bps) since mid-2021, while the two-year yield has stopped falling and rising since September.

The Indian rupee further weakened further by 75 points to a low of $ 75.16 per dollar. The domestic currency ended at $74.99 per dollar, down 0.28% from its previous close.

Aditi Nair, Chief Economist, Icra Ratings, said, “With the status quo on rates amid the pause in the GSAP programme, we now expect the 10-year G-Sec yield to be in the range of 6.25-6.4% in the balance of this quarter, when As long as there is a large volume of OMO purchases in this bucket, and crude oil prices fall below $70/barrel”.

Meanwhile, the markets rose for the second consecutive day on Friday, driven by optimism following a sluggish stance by the Reserve Bank of India. The BSE Sensex was up 381.23 points or 0.64% at 60,059.06. Nifty was up 104.85 points or 0.59% at 17,895.20.

Gaurav Dua, Head of Capital Market Strategy, Sharekhan, by BNP Paribas, said, “Monetary policy developments are positive for bond yields and banking stocks. The status quo on policy rates is in line with expectations. However, the RBI was expected to show no signs of a third wave of the pandemic and rising inflationary concerns due to the rise in energy prices globally, given the strong momentum in the economy. But the central bank reiterated its commitment to maintain liberal monetary policy to support economic growth and expects inflation to ease in the third quarter.”

RBI projected Consumer Price Index (CPI) based inflation for FY22 at 5.3% with equally balanced risks. The RBI retained the GDP forecast for the current fiscal at 9.5%, but said global semiconductor shortages, rising commodity prices and potential global financial market volatility posed as downside risks to economic growth. RBI said recovery in aggregate demand accelerated in August-September.

According to Upasana Chachra and Bani Gambhir, economists at Morgan Stanley, the next step in policy normalization would be to reduce the policy rate corridor through the reverse repo hike (15 bps) in the December policy review. “The risk of delay in the introduction of the repo rate hike will depend on the development situation and the management of the COVID-19 situation,” he said.