RBI's rate hike action results in bond yields rise sharply

Yield on 10-year government bond 7.16% 2023 ended at 8.58% compred with 8.19% Thursday

Government bond yields rose to a two-week high following the Reserve Bank of India's (RBI) decision to raise the repo rate by 25 basis points to 7.50 per cent.

The yield on the 10-year government bond 7.16 per cent 2023 ended at 8.58 per cent, compared with 8.19 per cent on Thursday. The yield had ended at 8.63 per cent on September 6.

A government bond auction for a notified amount of Rs 15,000 crore, which was due to take place on Friday, was also postponed to Monday.

“The 7.16 per cent 2023 bond may trade in the range of 8.65-8.40 per cent next week. There may also be partial devolvement in Monday's auction,” said S Srinivasaraghavan, head of treasury at Dhanlaxmi Bank.

As sentiments are bearish, the Street expects an OMO (open market operations) next week.

RBI also lowered the marginal standing facility (MSF) rate for banks by 75 basis points to 9.5 per cent and the minimum daily average cash balance that banks need to maintain to 95 per cent from 99 per cent before. However, that helped short-term rates to fall.

“Next week, the bias is towards yields rising. RBI will also announce the issuance calendar for marketable securities for the second half of the fiscal soon. That will provide further direction to bond yields,” said a government bond dealer with a public sector bank.