Inflation woes: 10-year bond yield near 7% ahead of RBI MPC meet

The yield on the 10-year government bond inched up to nearly 7 per cent ahead of the Reserve Bank of India’s (RBI) monetary policy review scheduled for Friday, as rising fuel prices may prompt the six-member committee to increase the inflation forecast for the current fiscal year.

The yield on the 10-year benchmark government bond closed at 6.92 per cent on Wednesday, up from the previous close of 6.90 per cent. The figure has gone up by almost 8 basis points in the past few days. According to the government’s borrowing calendar, it plans to borrow more in the first half of the fiscal year than what the market was expecting.

Last time the yield on a 10-year bond reached such levels was on June 26, 2019, when it touched 6.93 per cent.

“The rising yield on the 10-year bond may be attributed mainly to the nervousness before the credit policy announcement,” said Madan Sabnavis, chief economist, Bank of Baroda.

“There is a good chance that the RBI will move towards higher rates by changing its stance. (The bond yield) shall remain above 6.90 per cent tomorrow, too,” Sabnavis said.

A majority of market participants do not expect the monetary policy committee (MPC) to change the repo rate or the reverse repo rate. The RBI is also expected to continue with the accommodative stance of the monetary policy. However, the inflation projection of 4.5 per cent for FY23 may see an upward revision.

“Even as the MPC may decide to keep the policy rates and stance unchanged this week, it will be accompanied by a material rise in inflation forecast by 50-75 bps from the earlier forecast of 4.5 per cent, albeit still lower than our estimate of 5.8 per cent,” Madhavi Arora, lead economist, Emkay Global.

The rupee also weakened against the dollar on Wednesday. The domestic currency ended the day at Rs 75.76 against the dollar compared to Tuesday’s close of Rs 75.33.

“The dollar index was at its highest in the current move as the euro, GBP, and yen fell against the dollar. The minutes of the FOMC meeting would be released soon and that could bring about more hawkishness from Fed officials,” said Anil Kumar Bhansali, head of treasury, Finrex Treasury Advisors.

Meanwhile, oil futures rose on Wednesday as the threat of new sanctions on Russia raised supply concerns, countering fears of weaker demand following a build in US crude stockpiles and Shanghai's extended lockdown.

 Brent crude futures were up 78 cents, or 0.7 per cent, at $107.42 a barrel at 8.30 pm IST.