The 10-year benchmark yield closed five basis points higher on Wednesday at a four and a half month high level of 6.70%, even as expectations of a rate cut in the coming months dimmed with a hike in inflation forecasts.
The central bank pointed out in its report that inflation is expected to rise from its current level and range between 4.2% and 4.6% in the second half of this year, including the house rent allowance by the Centre. For the month of August, the CPI inflation accelerated to 3.36% from 2.36% in July.
“The MPC observed that CPI inflation has risen by around two percentage points since its last meeting. These price pressures have coincided with an escalation of global geo-political uncertainty and heightened volatility in financial markets due to the US Fed’s plans of balance sheet unwinding and the risk of normalisation by the European Central Bank. Such juxtaposition of risks to inflation needs to be carefully managed,” the policy statement indicated.
With this statement, the market believes that the chances of a rate cut in the near future remains bleak as the central bank remains committed to keep the CPI figure in control.
Even as the inflation targets have been revised marginally, the gross value added (GVA) figure has also been revised downward.
“The projection of real GVA growth for 2017-18 has been revised down to 6.7% from the August 2017 projection of 7.3%, with risks evenly balanced,” the policy statement read.
As Vijay Sharma, senior executive vice-president for fixed income at PNB Gilts, points out, the policy has given a neutral stance rather than a dovish one expected by the markets.
“The bond sell-off happened as expected of a dovish policy were built in by market players in the last two-three days. That position is being wound up, leading to sell-off post policy,” Sharma said.
At the same time, the rupee appreciated by 49 paise to close the day at 65.01 to the dollar. This is the highest single-day appreciation of the currency over the last seven months.
According to currency dealers, many foreign banks, which were long dollars, squared off their positions after the central bank indicated that a detailed review of current regulations on FPI debt investment would be undertaken to facilitate the process of investment and hedging by FPIs.
“Regulatory changes to be finalised in consultation with the Government of India and the Securities Exchange Board of India (Sebi) will be effective from April 2018,” it had said.
Some currency dealers have also indicated towards significant dollar-selling by a few corporates.
FPI inflows into Indian debt has been robust this year, with foreign investors having poured $20.45 billion on a net basis so far this year.