After hitting a three-and-a-half-year high on Tuesday, India’s benchmark 10-year bond yield tumbled nearly 3 basis points to 7.491 per cent on Wednesday despite a 50-basis-point hike in the repo rate. RBI’s Monetary Policy Committee, The hike is less than what some traders expected, as some of them felt that the RBI being higher will also increase the cash reserve ratio to draw more liquidity out of the system. inflation,
The yield on the 10-year benchmark 6.54 per cent 2032 paper fell to 7.491 per cent on Wednesday, 3 basis points lower than Tuesday’s 7.52 per cent. When its price rises, the bond yield falls.
ICRA Chief Economist Aditi Nair said, “While further rate hikes clearly remain on the table, with the revised repo rate remaining below pre-pandemic levels in terms of 4.9 per cent, systematic completion of the government lending programme. The comment is on having acted to cool the 10-year G-Sec yield.”
Repo rate is the rate at which RBI lends money to commercial banks, while CRR is the percentage of cash that banks are required to keep in reserves compared to their total deposits.
Nair said she expects repo hike of 35 bps and 25 bps respectively in the next two policies. However, the increase in yield will now be somewhat less than the earlier expectations, he said.
Asked whether the fall in bond yields could have an impact on inflation or liquidity, Madan Sabnavis, Chief Economist, Bank of Baroda, told news18.com, “Volumes in bond yields usually do not affect the liquidity in the system. Because the government has a fixed borrowing. Program that happens every Friday. The volatility in bond yields generally does not affect the quantum of borrowing.”
However, a change in the benchmark yield prompts bankers to change their interest rates on both deposits and loans.
RBI’s Monetary Policy Committee on Wednesday decided to raise the key repo rate increased by 50 basis points to 4.90 per cent. It also decided to focus on the return of housing to ensure that inflation remains within the target while supporting growth going forward.
The central bank also raised its retail inflation forecast for the current fiscal year 2022-23 by 100 basis points to 6.7 per cent, from 5.7 per cent estimated earlier. Retail inflation stood at an eight-year high of 7.79 per cent in April. However, RBI reserves the right to keep it in the range of 2-6 per cent.
DK Joshi, Chief Economist, Crisil, said, “Bond yields have fallen today (Wednesday) after the Monetary Policy Committee hiked the repo rate. This could be positive news for the economy as the cost of borrowing goes down with a fall in bond yields.
What are bonds and their yield?
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (usually corporate or government). Bonds are used by companies, municipalities, states and sovereign governments to finance projects and operations. In India, 10-year Government Securities (G-Secs) is the benchmark sovereign bond. Yield is the return on the bond. Bond yields and price fluctuations are inverse to each other. When bond prices rise, yields fall and vice versa.
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