Bond yields continue to harden; rupee goes past 76 to a dollar

On Tuesday, the yield on the 10-year benchmark government bond advanced 5 basis points (bps) to close the day at 7.19 % - close to a three-year high

Bond yields continued their northward journey after the Reserve Bank of India (RBI) on April 8 said its focus would be on the withdrawal of the accommodative stance, while announcing the first bi-monthly policy review for the current fiscal year (2022-23, or FY23).

On Tuesday, the yield on the 10-year benchmark government bond advanced 5 basis points (bps) to close the day at 7.19 per cent — close to a three-year high.

Yields hardened ahead of the March Consumer Price Index (CPI) inflation numbers, expected to stay above the 6-per cent mark. The yield of the 10-year bond hardened by 28 bps in the last three trading sessions — that is, since the RBI monetary policy review.

The retail inflation data, which was released by the government after market hours, showed March inflation at 6.95 per cent — a 17-month high.

CPI inflation was 6.07 per cent in February and 6.01 per cent in January.

 

Food prices, which contribute to nearly half of the CPI, climbed 7.68 per cent year-on-year in March, compared with 5.85 per cent a month before.

CPI inflation — the main yardstick of the RBI’s policymaking — is averaged above 6 per cent for the January-March quarter. The central bank has a mandate for targeting inflation at 4 per cent, with a variation of +/- 2 per cent on both sides. The RBI is answerable to lawmakers if it misses the band for three consecutive quarters.

Economists said inflation concern may compel the six-member monetary policy committee (MPC) to start hiking the repo rate from its June policy.

“CPI inflation exceeded the RBI’s target range materially, as rising food, logistics, and energy prices added to inflation. We revise our CPI forecast to 5.8 per cent for FY23, and now expect four 25-bp rate hikes from the RBI in FY23, starting from the June MPC meeting,” said Rahul Bajoria, managing director and chief India economist, Barclays, adding April CPI inflation is likely to be around 7.1 per cent.

“Inflation for 2021-22 stands at 5.5 per cent, and is expected by the RBI to rise to 5.7 per cent for FY23,” added Bajoria.

Bond yields are expected to harden further after inflation numbers presumably hit 7.5 per cent in the first half of the current fiscal year.

“With CPI inflation surging in March 2022, we expect the 10-year government securities (G-Sec) yield to cross 7.2 per cent imminently. With dimming hopes of early bond index inclusion, the 10-year G-Sec yield could test 7.5 per cent in the first half of FY23,” said Aditi Nayar, chief economist, ICRA.

Meanwhile, the rupee weakened further against the dollar on Tuesday amid strengthening of the dollar index. The rupee breached the 76 to a dollar to close the day at 76.14, compared with the previous close of 75.96.

“The dollar-rupee pair ended up tracking a sell-off in domestic equities and a strong dollar as global risk aversion increased on fears the US Federal Reserve may hike rates aggressively if March inflation comes on the upper side of expectation,” said IFA Global Research in a note.

“Investors are cautious that price pressures will remain elevated, with the Ukraine war disrupting flows of essential commodities, and China’s lockdowns straining supply chains,” the report observed.