Twitter
Advertisement

MSP hike to fuel inflation, harden bond yields, hit fisc in Sept quarter

Depreciating rupee may also keep yields under pressure

Latest News
article-main
FacebookTwitterWhatsappLinkedin

The yield on the 10-year government security (7.17 GS2028), which is the most traded paper in India and the benchmark for interest rates in the bond market, has displayed substantial volatility in the current fiscal. It rose from 7.4% in April 2018 to a closing peak of 7.99% on June 7, 2018, after the Monetary Policy Committee (MPC) raised the repo rate by 25 bps. 

Subsequently, the 10-year government security (G-sec) yield cooled after the Reserve Bank of India (RBI) infused liquidity by conducting an open market operation (OMO) to purchase Rs 10,000 crore in June 2018. 

The volatility in global crude oil prices has been transmitting swiftly to G-Sec yields, both on the upside and on the downside. Following the recent dip in global crude oil prices, the 10-year G-sec yield has eased further, dipping below 7.8%. 

While forecasting domestic bond yields has undoubtedly become fraught with uncertainty of late, we expect the 10-year yield to largely range between 7.75-8.1% in the rest of the second quarter of 2018-19, based on various domestic and global factors. 

While the initial response of the bond markets to the revision in minimum support prices (MSPs) for various kharif crops has been muted, once the inflation and fiscal implications of this revision become clearer, bond yields could undergo some uptrend.

Greater clarity on the extent to which various fiscal risks come to the fore, and the size of the government of India’s market borrowing calendar for the second half of FY2019 would drive the trend in G-sec yields. 

Depending on the extent to which the inflationary and fiscal risks materialise, the MPC may increase the repo rate by another 25-50 bps in FY2019. 

A change in stance to withdrawal of accommodation, which would signal that a series of rate hikes may be in the offing, may cause G-sec yields to harden.  

If the threat of global trade wars de-escalates, and once the US market starts to price in rate hikes by the Federal Reserve for 2019, the US 10-year yield may rise above 3%, which would result in some hardening of G-sec yields as well. 

While rupee depreciation would push up bond yields, the trend displayed by the rupee relative to emerging market currencies may influence the extent to which the RBI intervenes in the forex market.   We expect the 10-year yield to broadly range between 7.75-8.1% in the rest of Q2 FY2019.  

The writer is principal economist, Icra

Find your daily dose of news & explainers in your WhatsApp. Stay updated, Stay informed-  Follow DNA on WhatsApp.
Advertisement

Live tv

Advertisement
Advertisement