Reserve Bank of India: 10-year bond yield remains stable, but traders expect peak soon
India’s 10-year benchmark paper yield edged up to 6.37% on Thursday from 6.36% on Wednesday as traders chose to focus on the RBI’s moves despite the strong statement that the US Fed will soon start raising rates.
On Wednesday, the US Federal Reserve said it would cut its monthly bond purchases by a third starting in January and followed with interest rate hikes as it focuses on inflation.
The Fed plans to hike rates at least three times in 2022 and continue with two more hikes in 2023, as inflation control is a priority.
Dealers said local yields had not moved much as the market expected the US Fed to change positions. The focus, however, remains on local inflation and how the RBI will pull out of its accommodative monetary policy.
“India’s problems are bigger than those of the United States, whether it is inflation, the budget deficit or the current account. The next big event for us is the Union budget on February 1, which will give us an idea of the budgetary situation, followed by monetary policy. The overnight US action has been well valued and although it has no immediate impact, the RBI also cannot stand firm and allow arbitrage between US and Indian rates to decline ” said Naveen Singh, head of fixed income at ICICI Securities Primary Dealership. .
Bankers expect the 10-year yield to move towards 6.50% in case the government decides to borrow more.
India is now expected to be able to meet its fiscal deficit target of 6.8% in this fiscal year, which could lead to higher government borrowing and higher yields.
The RBI also faced difficult inflation dynamics with core inflation – the component of non-food and non-fuel inflation – reaching a five-month high of 6.08% in November.
Admittedly, the yield of the 10-year local benchmark bond has already fallen from its issue price of 6.10% in July to 6.37% currently.
“The rates are already on the rise. So, in a way, we’ve already bottomed out on rates, ”said State Bank of India deputy managing director Sastry Venkataramana.
The RBI also took its first step towards higher rates during its monetary policy review earlier this month by increasing the amount it absorbs from banks via the Variable Reverse Repo Auction (VRRR) of 14. days.
Governor Shaktikanta Das said the central bank will increase the amount it absorbs through the VRRR in two auctions to 6.5 lakh crore on December 17 and to 7.5 lakh crore on December 31, from the 6 lakh crore that it was taken from the banks on December 3, and liquidity will be absorbed primarily through auctions from January 2022, which will likely result in higher rates for banks when they place their excess funds with the RBI.
The central bank has so far held firmly to its accommodative stance to support growth, but that could change in the next policy as inflation becomes more prominent.