Home / Markets / The rise in 10-year G-sec yield shows an imminent rate hike

MUMBAI : Yield on the 10-year sovereign bond breached the 7.5% mark for the first time in more than three years as traders priced in a more aggressive pace of interest rate hikes ahead of the central bank’s monetary policy committee’s announcement on Wednesday.

The benchmark 10-year bond yield ended trading on Monday at 7.498%, up 4 basis points (bps) from its previous close. Yield rose as high as 7.5004% during intraday trading. Last week, the yield on the one-year T-bill hit 6.08% at the auction, the highest level since July 2019, compared to 4.81% in April.

Keeping pace
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Keeping pace

Rising yields indicate that bond traders expect RBI to take the repo rate to 6.5-7% by March 2023, higher than economists’ projection of 6-6.25%. Economists expect the Reserve Bank of India (RBI) to hike policy rates by 50 bps on 8 June.

“The market is expecting a higher terminal repo rate. As a result, it is pushing the curve higher. The 10-year yield was up 10-15 bps in the past week. That means the market is expecting the curve to shift higher. In the same week, the one-year T-bill cut-off was at 6%. So, Overnight Index Swap (OIS) market is predicting the terminal repo rate would be 6.5-7%," a debt fund manager said on condition of anonymity.

With crude touching $120 per barrel, the bond market is expecting consumer inflation to quicken to 7% in FY23, faster than RBI’s forecast of 5.7% and economists’ expectation of above 6%. India’s retail inflation surged to an eight-year high of 7.79% in April, well above average market expectations.

Therefore, traders are expecting more aggressive rate hikes from RBI, which is pushing yields higher. As a result, the yield on 10-year G-Sec has already gone up by 20 basis points over the past 10 days.

At the off-cycle meeting in May, the central bank’s rate-setting panel raised the repo rate by 40 basis points to 4.4% and the cash reserve ratio (CRR), or the share of deposits lenders must park with the central bank as reserves, by 50 basis points to 4%, draining 87,000 crore of liquidity out of the system, as inflation remained above the RBI’s 6% upper tolerance limit since January.

According to a Mint poll, five out of 10 economists expected the RBI to raise the repo rate from the current 4.4% to 4.9%, while the rest expect a 35-40 bps rate hike to 4.75-4.8%. Half of those polled also expect a 25-50 bps hike in CRR.

Banks have already raised repo-linked and the marginal cost of funds-based lending rates (MCLR) since May, leading to an increase in borrowing costs for retail and corporate customers. The June policy will be keenly watched from the point of view of rate action and the RBI’s thoughts on growth and inflation, analysts said. “As potential monetary policy action is dovetailed to its projections on growth and inflation, the markets will be looking for some direction to be provided by the central bank on both these indicators," said Madan Sabnavis, chief economist, Bank of Baroda.

According to Pankaj Pathak, fund manager-fixed income, Quantum AMC, “The bond market is already positioned for front-loaded rate hikes. The broader market expectation is that RBI will hike by 40-50 bps in the June meeting. Any smaller rate hike will be a positive surprise, and short-term bond yields may soften marginally."

Meanwhile, the rupee depreciated to a record low of 77.73 against the dollar in the past fortnight but has found support at the 77.5 level. “Higher domestic inflation, FPI outflows, risks to domestic growth outlook and a widening trade deficit continue to weigh on the rupee. We expect the Indian currency to trade in the range of 77.5- 78/$ in the next fortnight with a depreciating bias," Bank of Baroda said in a report on Monday.

Gopika Gopakumar
Gopika Gopakumar has worked for over 15 years as a banking journalist across print and television media. Her expertise lies in breaking big corporate stories and producing news based TV shows. She was part of the 2013 IMF Journalism Fellowship Program where she covered the Annual & Spring meetings of the International Monetary Fund in Washington D.C. She started her career with CNBC-TV18, where she also produced a news feature show called Indianomics and an award winning show on business stories from South India called Up South. She joined Mint in 2016.
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