3-day MPC meeting begins: Bond yields spike to over 3-year high

While a hike in the repo rate of 40-50 basis points has been pencilled in, the bond markets are bracing for some hawkish commentary, experts said.

RBI MPC review
RBI governor Shaktikanta Das admitted that the rate-setting panel was set to fail in its mandate, with inflation overshooting the upper bound of its target range of 2-6% for three quarters in a row.

Even as the Reserve Bank of India’s monetary policy committee began its three-day meeting on Monday, the yields on the benchmark 10-year bonds breached the 7.5% level in intra-day trades on Monday before closing at 7.49%, the highest levels since January 2019.

While a hike in the repo rate of 40-50 basis points has been pencilled in, the bond markets are bracing for some hawkish commentary, experts said. Meanwhile, the yield on the US treasury has trended up over the last five sessions and was trading 5 bps higher at 2.9% on Monday evening.

Bhaskar Panda, executive vice-president & head, overseas treasury, HDFC Bank, believes a 40 bps hike in June could be followed up with a 25-35 bps hike in August. “It is possible the cash reserve ratio could also be increased by about 25 bps now but the stance is likely to remain accommodative,” he said. Panda expects the yield to move in the range of 7.5-7.75% over the next six months.

In an off-cycle meeting early May, the RBI raised the repo by 40 bps to 4.4% and the CRR by 50 bps taking it 4.5% of net demand and time liabilities, in a move that impounded some Rs 87,000 crore of liquidity.

The long-term yield has now moved up by about 175 bps from the bottom in October 2020, whereas the repo has moved up by 40 bps.

Mahendra Jajoo, CIO, Mirae Asset Management, believes there could be a further hike in the CRR by about 50 bps but possibly in phases. “The RBI would be looking to bring down the surplus liquidity to levels of around Rs 2 trillion possibly by October from levels of around Rs 3.5 trillion currently,” he said. Jajoo said it was unlikely the RBI would conduct any open market operations before the second half of the year and would probably wait for more visibility, on crude oil prices and the inflation trajectory.

Inflation forecasts of economists for FY23 range between 6.6-7.2% with the rate coming off towards the end of the year. Going by the 6% rate on the one-year T-Bill, the market appears to have priced in a peak repo rate of around 6%, implying additional hikes in the repo rate of 160 bps.

Astha Gudwani and Mohammed Faiz Nagutha, economists at BofA Securities, wrote recently it was important that the RBI exits ultra-accommodation by August and takes policy repo rate to the pre-pandemic level of 5.15%. “Accordingly, until then we expect the MPC to retain the stance as accommodative while focusing on withdrawal of accommodation. Thereafter, as inflation continues to stay high, we see the RBI MPC take policy repo rate to 5.65% by March, 2023,” they wrote.

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