Mumbai: The yield on 10-year government bonds on Thursday closed near 8% mark—first time since December 2014, a day after the Reserve Bank of India (RBI) raised key interest rates and change liquidity coverage norms.

The 10-year bond yield closed at 7.993%—a level last seen on 7 May 2015, from its Wednesday’s close of 7.913%. Bond yields and prices move in opposite directions.

Yields are already at their highest in three years and further increase of a few more basis points could take us back to the days of December 2014, when the 10 year yield was at 8.06%.

Analysts do not rule out surge in yields over 8% in next few sessions on the optimism that RBI to hike rates by another 25 basis points in its next policy.

“We had previously expected the start of the rate hike cycle in 4Q18. However, reflecting this earlier than expected move, we now expect the rate hikes to be front-loaded. Specifically, we expect rate hikes in the August and October meetings but that the total quantum of rate hikes will remain at 75bps for this cycle", noted Morgan Stanley in a report.

“Our framework on assessing further actions by the RBI remains centred on the inflation outlook. Considering that the inflation outlook is pegged by the central bank at 4.7% year on year in second half of fiscal year 2019, two more rate hikes would take real policy rates to ~205bps from 165bps currently. The risk to our view is if the MSP policy turns out to be more inflationary than expected or if incoming data on inflation surprises on the upside", the report added.

The central bank on Wednesday increased key interest rates by 25 basis points to 6.25%, the first such hike in more than four years, as inflation concerns mounted and kept its neutral policy stance.

RBI also allowed 2% more statutory liquidity ratio (SLR) securities under liquidity coverage ratio. The banks can now use SLR carve out of 13% to meet liquidity cover ration.

The central bank also increased its inflation forecast for the fiscal year 2018-19 to 4.8-4.9% for the first half and 4.7% in the second half of 2018-2019. In the previous policy review, RBI had predicted average inflation to be 4.7-5.1% for first half of the current fiscal and thereafter slow to 4.4% in the second half.

“With no great triggers for yields to ease, we could expect long bond yields to remain at elevated levels. Short end may get respite to reduced LCR related issuances, so we could expect some easing at shorter end of the yield curve. Prudence demands to stay at short end of the yield curve and continue to favour accruals over duration." said Lakshmi Iyer, CIO (debt) and head, products, Kotak Mutual Fund.

Meanwhile, the Indian rupee weakened against US dollar. The currency closed at 67.13, down 0.31% from previous close of 66.93.

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