The bond market expects yields to appreciate sooner than anticipated.
Given rising inflation and interest rate expectations, 10-year yields are expected to be in the 8-8.25% band for most of this year, may be even touching 8.5%, said players.
Yield on the 10-year 6.35%, 2020 paper closed Friday at 7.57%.
“We are anticipating a hike of 100 to 125 basis points (100 basis points make a percentage point) in the reverse repo and repo rate in 2010. Besides, the cash reserve ratio (CRR) may be hiked by 150 basis points this year,” said Shubhada Rao, chief economist at Yes Bank.
The reverse repo and repo rates are currently at 3.25% and 4.75%, respectively, while CRR is at 5%.
Rao sees a hike of 50-75 basis points in the interest rates in the April monetary policy of the Reserve Bank of India.
Government borrowings for next fiscal is also not expected to come down significantly from Rs 4.5 lakh crore in the current fiscal.
“Gross borrowings for the next fiscal will be around Rs 4 lakh crore,” said Arun Kaul, executive director, Central Bank of India.
Meaning, a large supply of gilts from RBI is a given.
“The supply may continue even in the next fiscal. But unfortunately, liquidity may not be comfortable like in 2009,” said K Ramkumar, head of fixed income at Sundaram BNP Paribas MF.
Ramkumar bets the 10-year yield will move at 8-8.25% this year, even touching 8.5% sometime.
“Liquidity management will become a challenge for the RBI and this will result in the yield on the 10-year benchmark touching 8% soon and going on to 8.25%,” said Srinivasa Raghavan, head of treasury at IDBI Gilts.
“During this month, the yield may be in the range of 7.5% to 8%,” said Sandeep Bagla, senior vice-president at ICICI Securities Primary Dealership.
Inflationary pressures will continue to exist. For the week ended December 19, food inflation came in at 19.83% as compared with 18.65% a week ago.
“Even if food inflation is brought under control, manufacturing inflation will continue to put pressure on interest rates,” said Mridul Saggar, chief economist at Kotak Securities. He sees the 10-year benchmark yield at 8.5% sometime around the middle of this year.
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