RBI governor says rising due to confluence of both domestic and external factors
Bond yields softened after the Reserve Bank of India (RBI) tried to assuage the fears of the market saying that it will provide adequate liquidity if there is a need and took a less hawkish tone than expected on the inflation saying that it would rise in the first half of this year before tapering to the levels projected by the central bank next year.
RBI governor Urjit Patel said in a press conference,"Bond yields are rising due to a confluence of factors both domestic and external that form the backdrop of this development and other fiscal developments. The US treasury yields hardened by 0.45% in the last six months and domestic factors include inflation increasing due to higher crude prices. With the uptick in economic growth, there is pressure on financial capital and expectation of fiscal slippages."
The yields in the government bond market have softened marginally from the previous day's close. The new 10-year benchmark bond closed at 7.53%, which is 7 basis points (bps) lower than previous day's close while the old ten-year closed at 7.69%, 6 bps lower than the previous day's close.
The RBI revised up its inflation projection to 5.1% for the first half of 2018 from 4.3% to 4.7% projected earlier. For 2018-19, it projects inflation at 5.1% to 5.6% before moderating to 4.5% to 4.6% in the second half with upside risks.
Abheek Barua, chief economist, HDFC Bank, said, "The monetary policy was, in our opinion, far less hawkish than expectations, implying that unless things go really awry (particularly in oil markets or the domestic fiscal) and push inflation way above the projected trajectory, the RBI could stay on hold. In the near term, we see the possibility of some decline in bond yields. However given the pipeline of issues from the states and the centre, we think that the rally could be shallow."
State Bank of India (SBI) said in report that the Indian 10-year G-sec yield had been steadily declining from 2014 and was somewhat flat during the first half of 2017. But since the second half of 2017, yields have moved up by 114 bps, in a period of about seven months. During the same period, the bond yield has also increased in five developed/ developing countries (China, Germany, UK, US and Euro Area) and it is within the range of 22 to 42 bps, said the report.
"We believe that currently, the 10-year G-sec yield in India are at elevated levels and not in sync with macro fundamentals. The reason why we call these exceptionally high is that the spread between the overnight repo rate and the 10-year G-Sec yield has increased to 169 bps in Feb'18 and the spread between overnight repo rate and SDLs yield has increased to 220 bps. Such a large spread has been seen only a few times in the last decade and only during a crisis. Needless to say, such high yields push up government borrowing costs and are surely inimical to monetary policy transmissions, as this will put upward pressure on bank MCLR rates," the report added.
CALMING DOWN
- The new 10-year benchmark bond closed at 7.53%, which is 7 basis points (bps) lower
- The old 10-year closed at 7.69%, 6 bps lower
- US treasury yields hardened by 0.45% in the last six months
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
 "RBI")
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}