The 10-year benchmark yield rose three basis points from Thursday’s close to 7.74% on Monday after the rupee witnessed a fall and emerging market assets saw a sell-off due to a stronger-than-expected US jobs data.
“The strong US jobs data increase the probability of an early rate hike in the US. This has led to a sell-off in the emerging market bonds and equities,” said Sandeep Bagla, associate director at Trust Group.
The 10-year benchmark yield had been moving in the range of 7.65% to 7.90% in 2015 due to several factors, including two surprise rate cuts by Reserve Bank of India (RBI), the Union Budget and external conditions like the US jobs data that pushed the yields up.
Bond market experts say RBI may like to go slow on rate cuts till it analyses the impact of a hike in interest rate in the US. “The worries are two fold — the foreign investors may be able to allocate less to emerging markets like India in the future and RBI may cut rates at a slower pace to evaluate the impact of US rate hike,” Bagla added.
RBI had recently repeated its surprise rate cut for a second time this year when it cut the repo rate by 25 bps to 7.50%. Earlier, it had cut the repo rate by 25 bps on January 15 after which the yield softened to 7.69% levels.
On February 2, a day before the monetary policy, the yields hit the lowest level since mid-2013 at 7.65%. However, the gains were erased when RBI decided to keep the repo rate unchanged.
Expectations of a further 25-50 bps rate cut are still high in the market with experts anticipating the yield to stabilise at current levels. “The benchmark yield is likely to stabilise at 7.75% levels, at least in the near term,” said Lakshmi Iyer, chief investment officer at Kotak AMC.