The government is not ruling out an increase in interest rates, an official told reporters in New Delhi, asking not to be identified citing rules.
The yield on the benchmark bond on Wednesday fell by five basis points to 8.13%, over Tuesday’s close. This was almost entirely due to a rebound in the rupee after media reports said the government may announce measures to support the currency after a planned review of the economy by Prime Minister Narendra Modi this weekend. The government is not ruling out an increase in interest rates,an official told reporters in New Delhi, asking not to be identified citing rules.
The benchmark yield has seen an increase of 36 basis points from the level of 7.77% seen in the middle of June. Bond markets are nervous as global crude oil prices remain elevated at over $79.3 per barrel, which together with the weakening currency — which has now lost 3.5% in the last 10 sessions alone — would add to inflation concerns. On Wednesday, the rupee closed 51 paise stronger to 72.18 against the Dollar. According to a money market expert, ‘the markets are worried about the inflationary impact of the weakening currency or the imported inflation.
Second, they are concerned about the rate actions that the Reserve Bank India (RBI) will take at the next monetary policy meeting and after that.” Moreover, the markets are worried about fiscal slippage in 2018-19, given there are chances of a revenue shortage going by the current trend of smaller than expected GST collections.
“It is possible the government may need to borrow at more than planned,” he pointed out. Analysts at CARE Ratings observed there has been a notable increase in secondary markets yields of corporate bonds since November 2017. There is an apprehension that the RBI will tighten monetary policy. “Volumes are happening but they are relatively thin and sellers are not able to get a good price.
There is little appetite for bonds at this point,” they said. Anticipating higher inflation, the RBI has raised its policy repo rate in two successive meetings by 25 basis points each, at its last two policy reviews in June and August. The repo rate is now at 6.5%. Manish Wadhawan, managing director and head of fixed income at HSBC India, observed: “The movement of bond yields are now being driven by factors beyond those that normally influence interest rates, i.e., inflation and growth.
They are being impacted by developments in the external sector. INR depreciation of 11% YTD has led to fears of monetary tightening. There is an expectation that the RBI may tighten monetary policy.”