The minutes of the Monetary Policy Committee (MPC) meeting which hinted exiting from the neutral stance on interest rates pushed up yields in the government security market on Thursday.
The yields on the 10-year benchmark bond ended at 7.75%, about 4 basis points higher than the previous day’s close.
Michael Patra, executive director at Reserve Bank of India (RBI) and an MPC member, was of the view that the time to begin rate hikes is upon the central bank and a series of rates hikes may be needed to ward off the risks to inflation.
During the day, the yields rose up to 7.80% as minutes of Federal Open Market Committee (FOMC) meeting also hinted at rate hikes, which sent the US treasury yields to a four-year high of 2.96%.
A senior treasury officer at a public sector bank said, "The very hawkish outlook of the MPC minutes and FOMC minutes that hinted at rate hikes disturbed the market."
The minutes of the MPC meeting showed all six members noted that inflation continued to rise in a broad-based fashion. MPC noted that the inflation outlook is clouded by several uncertainties on the upside. They said that global recovery could push up crude and other commodity prices, staggered impact of the HRA increases by various state governments could potentially push up inflation from the current levels.
Michael Patra who was the only one who voted for a rate hike citing hardening of crude prices said that the RBI is behind the curve. “In view of the prolonged period of status quo, a series of rate increases may be warranted to remove excessive accommodation. The time to begin is upon us,” Patra said.
Morgan Stanley said in a report, “In this context and also from our read of the MPC statement and the minutes, while the next move is likely to be a rate hike, it is unlikely to be taken up immediately. Considering that we see upside risks to our inflation forecasts, the risks are also tilting towards an earlier-than-expected rate hike.”
RBI governor Urjit Patel said, “Inflation risks have increased in recent month.”
While Viral Acharya, deputy governor, RBI, said if growth remains robust and inflation prints continue to project headline inflation a year ahead well above the target, then a change in stance from "neutral" to "withdrawal of accommodation" might have to be considered.
Even the external members Ravindra Dholakia and Pami Dua who are considered to take a dovish stand felt that the rise in inflation is inevitable. Dholakia and Dua said the risks to inflation are rising, but wanted to pause at a time when growth is just turning around while continuing to maintain a neutral stance. The third external member Chetan Ghate said there are fewer mitigating factors to inflation compared with two months back.
THE FINE PRINT
- The minutes of the MPC meeting showed all six members noted that inflation continued to rise in a broad-based fashion
- During the day, the yields rose up to 7.80% as minutes of the US FOMC meeting also hinted at rate hikes
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