– Utsav Saxena
The yield on the benchmark bond on Tuesday rose to 8.18%, its highest level since November 11, 2014. Yields have gone up sharply in the last few trading sessions; money market experts said yields at the short end — across treasuries, commercial paper (CP) and certificates of deposits (CD) — have jumped by 25-30 basis points.
The benchmark yield has seen an increase of more than 40 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 $77.5 per barrel, which together with the weakening currency — which has now lost 3.56% in the last 10 sessions alone — would add to inflation concerns. On Tuesday, the rupee closed at 72.69 against the dollar after touching intra-day lows of 72.73. According to a money market expert, yields are moving up primarily for three reasons. “First, 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,” he observed.
Moreover, they added 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,” they pointed out. The cost of borrowings for corporates in the bond markets has been rising in recent months as reflected in the increase in yields. Analysts at CARE Ratings observed there has been a notable increase in secondary markets yields of corporate bonds since November 2017.
They explained the average corporate bond yields — across maturities — have risen to a near two and half year high of 9.10% in August, a 3 bps increase from month-ago levels and a 112 bps rise from that in November last year. The movement in corporate bond yields has been largely in line with that of the rise in GSec yields. The average yield of the benchmark 10-year GSec in August 2018 was 85 bps higher than that in November 2017. The movement of the bond yields is now driven by factors beyond those that normally influence interest rates, money market experts pointed out. This is now being impacted by the very sharp depreciation of the currency.
There is an apprehension that the RBI will tighten monetary policy. Yields have risen both at the short and long end. At the short end, yields across treasuries, CPs, and CDs have risen by about 25-30 basis points in the first half of September. “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%.
A clutch of lenders including State Bank of India, ICICI Bank, HDFC Bank and Bank of Baroda have all raised their marginal cost of funds-based lending rate (MCLR) over the past 10 days. Before that, several lenders had raised their deposit rates. Experts believe there is a possibility of another rate hike soon and another two hikes in the next three to nine months, partly on inflation concerns but also to help arrest the slide in the currency. According to experts, the forthcoming rate hikes would be taken less from a point of view of rising inflation and more due to the currency depreciation.