Bond yields fall 14 bps on less hawkish stance by monetary policy committee

Fall in global crude oil prices also leads to a sharp decline in bond yields

A combination of factors, including the less hawkish tone of monetary policy committee (MPC) members, fall in global crude oil prices and traders rushing to cover short positions led to a sharp fall in government bond yields.

This comes even as the broader sentiment of imminent rate hike still looms large to tackle the rise in prices.

The yield on the 10-year government bond ended the day at 7.04 per cent as compared to the previous close of 7.17 per cent. The rally in bond prices is the biggest since September 2020.

Yields shot up by 22-basis points (bps) after the monetary policy review on April 8 as the Reserve Bank of India (RBI) turned its focus to tackle inflation. This is a departure from its growth-supportive stance, which was in force for the last two years.

Yields further hardened after the March CPI inflation numbers, which was close to 7 per cent. This is much higher than the RBI’s upper tolerance level of 6 per cent.

However, the minutes of the MPC, which was released on Friday, showed members are still worried about both growth and inflation.

“Emerging from the Omicron wave, India’s economic recovery remains on track, although there are weak spots. Private consumption and investment are still subdued and contact-based services, although catching up, are yet to recover fully,” RBI governor Shaktikanta Das said, the minutes showed.

Fall in crude oil prices and no announcement of state development loan auctions yet have also helped cool down the yields.

“After touching a three-year high of 7.28 per cent, India's 10-year bond yield has cooled off to near 7 per cent levels. The monetary policy stance by global central banks has changed. So, RBI’s policy stance can’t be on a different page,” said Vishal Amarnani, head — fixed income, Emkay Wealth Management.

“The fall in yields could also be due to RBI buying or liquidity infusion into the system. We are still expecting the G-Secs to touch 7.35 per cent first. If it does not sustain at that level, it could rise to as high as 7.60 per cent,” Amarnani added.

Rupee weakened 20 paise against the dollar on Monday as investors rushed for safe-haven assets. The dollar index surged as rising inflation may lead to a faster hike in interest rates by the US Federal Reserves.

“The rupee, after opening on a flat note, fell following broad strength in the dollar against its major crosses and weakness in domestic equities. Concerns over higher inflation, going ahead, are also disturbing the market sentiment. The dollar has been strengthening after the Federal Reserve chairman hinted towards aggressive rate hikes in the near future,” said Gaurang Somaiya, forex & bullion analyst, Motilal Oswal Financial Services.