The benchmark yield closed at a 15-month high level of 7.08% on Monday, with the market seeing little room for the central bank to cut rates, given the inflationary pressures and high fiscal deficit. The last time it closed above this level was in September 2016. The yield on the benchmark bond rose to as high as 7.10% during the day before closing at 7.08%. Vijay Sharma, executive vice-president for Fixed Income at PNB Gilts, said there is little room for the Reserve Bank of India (RBI) to cut rates. He expects the central bank to continue its cautious stance on inflation. “You have concerns over inflationary pressures that have gained momentum with oil prices sustaining above the $60/barrel mark,” Sharma added. Brent crude has consistently remained over the $60-mark since the end of October and has risen by 10% since the previous monetary policy in October.
A lot of uncertainty persists over the future of oil prices. Last week, the Organisation of the Petroleum Exporting Countries (OPEC) decided to extend production cuts of 1.8 million barrels per day till the end of 2018, which pushed up prices. But at the same time, increased activity by US shale oil drillers some feel can keep a check on prices over the coming months. Bond market experts also point towards concerns over fiscal deficit which they say are reflecting on the yields. “GST collection for the month of October has been reported lower than the previous months and the forthcoming months do not present a promising picture. Revenue shortfall is a given unless it is made up via PSU dividends or divestments,” Sharma points out. And while growth has started to pick up, the central bank is unlikely to offer any stimulation through a rate cut till it has a fix on the inflationary trend. India’s GDP growth stood at 6.3% in the second quarter this fiscal compared with 5.7% in the first quarter.
This was a bounceback after five consecutive quarters of a downtrend. Lakshmi Iyer, CIO (debt) and head – products at Kotak Mutual Fund, states this policy comes at a time when crude prices have inched up, GDP growth has bounced back post GST impact, and US prepares to resume its normalising of rates. “Yields in the bond market have already hardened by approximately 25-30 bps since the previous policy and the market mood would continue to remain apprehensive till the policy decision. Deposit rate hikes by a couple of PSU banks will also continue to weigh on market sentiments, as liquidity continues to remain tight,” Iyer points out.