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Business News/ Market / Stock-market-news/  Bonds face worst loss in three years after RBI signals end to easing
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Bonds face worst loss in three years after RBI signals end to easing

The yield closed at a three-month high of 6.739%, up 31 basis points from its previous close of 6.431%

The RBI’s monetary policy committee noted that significant upside risks to inflation still remain in the form of ‘hardening profile of international crude prices, volatility in the exchange rate on account of global financial market developments’. Photo: ReutersPremium
The RBI’s monetary policy committee noted that significant upside risks to inflation still remain in the form of ‘hardening profile of international crude prices, volatility in the exchange rate on account of global financial market developments’. Photo: Reuters

Mumbai: The yield on India’s benchmark 10-year government bond jumped 31 basis points on Wednesday, the most since September 2013, after the Reserve Bank of India kept rates unchanged at its second consecutive policy meet and changed its stance from ‘accommodative’ to ‘neutral’.

Analysts expects the change in policy stance is an indication of the end of the rate cutting cycle, unless consumer price inflation falls more than expected.

The yield closed at a three-month high of 6.739%, up 31 basis points from its previous close of 6.431%. Bond yields and prices move in opposite directions.

“The market was only prepared for cut or pause in the foreseeable future. Now changes in stance has opened up room for policy tightening in case of exigencies. Changes in stance without prior hint, is critical in this policy, than no action" said Soumyajit Niyogi, associate director at India Ratings and Research

The central bank is assessing how the transitory effects of demonetisation on inflation and the output gap play out. A Mint poll of 10 economists had showed that seven of them expected a rate cut by at least 25 bps. The rest said they expected the central bank to hold rates in this policy and wait for more macroeconomic data to emerge in April.

“Absence of further rate easing and lack of active open market operation purchases will aid hardening in government securities (G-Sec) yields," said Dhananjay Sinha, head of institutional research at Emkay Global Financial Services Ltd.

“We expect further steepening in G-Sec curve with 10 year yield hardening to over 7%. The above view is also in tandem with our G-Sec yield model of rising G-Sec yield from improvement in bank credit demand, tightening global financial conditions and hardening US yields," he added.

The monetary policy committee remains committed to bringing headline inflation closer to 4% on a durable basis and in a calibrated manner.

This requires further significant decline in inflation expectations, especially since the services component of inflation that is sensitive to wage movements has been sticky, said the monetary policy statement.

“The RBI’s decision to stand pat while changing its stance suggests that it is now focused on its medium-term inflation target and has become concerned about adverse global conditions (higher global inflation and risk of exchange rate volatility)," said Nomura Research in a note to its investors.

The committee noted that significant upside risks to inflation still remain in the form of “the hardening profile of international crude prices; volatility in the exchange rate on account of global financial market developments, which could impart upside pressures to domestic inflation; and the fuller effects of the house rent allowances under the 7th Central Pay Commission (CPC) award which have not been factored in the baseline inflation path."

“The RBI stance of focus on inflation than policy rates will be positive for long term as credit pick-up is less dependent on policy rates than on other factors," said Sundar Sanmukhani, head of fundamental research, Choice Broking.

Nomura expects the inflation to average above its target (at 5% in FY18) and thus, expect policy rates to remain unchanged at 6.25% throughout 2017 against its earlier expectations of a 6% terminal rate.

The rupee closed at a fresh three-month high of 67.19, a level last seen on 10 November 2016, up 0.33% from its previous close of 67.41. The rupee opened at 67.37 a dollar and touched a high and a low of 67.19 and 67.38, respectively. It has now closed higher in 10 out of last 11 trading sessions.

India’s benchmark Sensex index fell 0.16% or 45.24 points to close at 28,289.92. So far this year, Sensex has risen 6%.

Since the beginning of this year, the rupee has gained 1.1%, while foreign institutional investors have bought $135.20 million and $125.30 million from local equity and debt markets respectively.

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Published: 08 Feb 2017, 04:23 PM IST
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