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Business News/ Markets / Commodities/  Bond yields reach peak; may stay under check going ahead, say analysts

The benchmark Indian government 10-year bond yields are likely to remain under check going ahead amid the low inflation and steady interest rate scenario, analysts said.

The bond market's focus remains on the Reserve Bank of India's (RBI) upcoming monetary policy decision, wherein the central bank is widely expected to keep the repo rates unchanged.

Cooling retail inflation prompted the central bank’s Monetary Policy Committee (MPC) to hold interest rates in April, after raising rates by 250 bps since May 2022.

Since the April RBI policy, India’s 10 year bond yield had been in a downtrend, falling from 7.22%, to as low as 6.90%. 

“RBI MPC policy action and stance would remain the same along with a non-committal forward guidance. So that won’t move the 10-year yield very significantly, however if MPC remains concerned about inflation amid the risk of unseasonal rainfall and El Nino then expectations of a long pause may keep the 10-yr yield afloat. However, speculation of a dovish Fed next week on the back of sluggish US economic data may limit any upside in our bond yields," said an economist with a private bank.

She expects the trading range for the 10-year bond yield to be 6.85-7.15%.

Also Read: RBI Monetary Policy preview: Could the central bank signal the end of the tightening cycle?

Analysts believe strong domestic macroeconomic conditions, with robust GDP data, cooling inflation, fiscal deficit in check, foreign capital inflows and falling crude oil prices will be supportive of Indian government bond prices. 

Bond prices and yields move in opposite direction to each other. When the bond prices rise, the yields tend to fall.

“Falling inflation, strong GDP and lower crude oil prices have kept the bond yields in check. The RBI is expected to maintain status quo on repo rates and keep its stance of ‘withdrawal of accommodation’ unchanged. Amid supportive macros, bond yields are likely to have remain capped going ahead," said Amit Sajeja, Vice President Research - Commodities & Currencies at Motilal Oswal.

Sajeja believes bond yields peaked at around 7.4% earlier and now will trade in the range of 6.8% to 7.2%.

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Meanwhile, demonetisation of 2,000 note may provide temporary relief to liquidity and analysts believe this will also help cap upside in the bond yields.

“Since the last policy, yields on 10Y G-sec have fallen sharply by 22 bps and are currently trading around the 7% mark, compared with 7.26% before the April policy. Possible pause by the US Fed and decline in international oil prices has helped. In addition, reduced need of RBI to infuse liquidity in the system has also taken off the pressure," said Sonal Badhan, Economist, bank of Baroda.

She projects 10-year yield to trade in the range of 6.95-7.05% this month.

In the US, a pause in interest rate hike may result in halting the US treasury yield, which eventually starts descending, but that gets capped with an unabated supply of bonds as the debt ceiling stands raised. This will result in adding supply side pressure as the US banks are already tight on liquidity. 

On Tuesday, India’s 10-year benchmark 7.26% 2033 bond yield ended at 6.97%, slightly lower than the previous close of 6.9958%.

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Updated: 06 Jun 2023, 04:34 PM IST
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