Bond yields drop as RBI seen reversing Covid period rate cut

Bond yields dropped by 9 bps on Wednesday after the market sensed that the Reserve Bank of India (RBI) may not be very aggressive with rate hikes and the terminal repo rate for this rate hike cycle could be around 5.15-5.25 per cent as compared to over 7 per cent seen earlier.

According to bond market participants, the monetary policy committee of the RBI is now expected to only reverse only the rate cut during the Covid-19 period, which was 115 bps. (100 bps = 1 percentage points)

The yield on the 10-year benchmark government bond fell almost 9 bps to end the day at 7.21 per cent. In the last two sessions, yields have fallen by 25 bps.

In a surprise move last week, the MPC had an unscheduled meeting in which the repo rate or the key policy rate was increased by 40 bps to 4.4 per cent. The RBI also increased banks’ cash reserve ratio (CRR) requirement by 50 bps to 4.5 per cent.

The bond market is also expecting some support from the central bank to carry out a massive borrowing programme of the government which is Rs 13.41 trillion for FY23. While RBI is unlikely to conduct open market operations to infuse liquidity since such a move will be contradictory to CRR hike, a hike in the bank’s held to maturity category will create more headroom for lenders to buy government securities.