Yields on 10-year government securities hardened on Wednesday after the Reserve Bank of India (RBI) kept the stance of withdrawal of accommodation unchanged on concerns about the slower pace of decline in inflation. The central bank also increased the repo rate by 25 basis points (bps) to 6.5%, which was in line with market expectations.
The benchmark yield ended at 7.344% after touching an intra-day high of 7.355%. The 10-year bond yield closed 0.45% higher on Wednesday compared to its previous close of 7.311%, Bloomberg data showed.
HDFC Bank’s research wing is expecting the 10-year paper to trade in the range of 7.30-7.35% in the near-term as the policy was more hawkish than expected. The RBI statement indicates that another rate hike cannot be ruled out as the central bank did not switch to neutral stance, market experts said.
“The latest statement indicates that there will be no rate cuts this year, and instead the RBI will opt for a prolonged pause,” Sonal Bandhan, economist at Bank of Baroda, said. The 10-year rates will range between 7.20% and 7.40% this year, she said.
The benchmark yield curve is expected to steepen in FY24 amid the demand-supply dynamic on bonds with longer maturities. Yields on 10-year bonds will be in the range of 7.25-7.50% in the medium term, Edelweiss Mutual Fund said in a note.
Separately, the RBI restored the trading hours in the money markets to those in the pre-pandemic period i.e. 9 am to 5 pm. The new timings will be applicable to call, market repo and tri-party repo in G-Sec, commercial papers, certificates of deposit and rupee interest rate derivatives segments. The change of timing will come into effect from February 13.
The RBI has also proposed allowing investors to lend and borrow G-Secs so that they can deploy their idle securities and add liquidity to the market. As of now, lending and borrowing of securities can be done through repo markets, but some participants, such as insurance companies, are not allowed to borrow funds against securities, deputy governor T Rabi Shankar said in the post-policy conference.