Sovereign bonds plunge as RBI holds key rate

The yield on govt notes due September 2026 jumped 21 bps to 6.41% in Mumbai, prices from RBI's trading system show

Sovereign bond yields climbed the most in three years after policymakers kept interest rates unchanged, ahead of a probable increase in US borrowing costs this month.

The monetary policy committee, led by Reserve Bank of India (RBI) Governor Urjit Patel, left the benchmark repurchase rate at 6.25 per cent, according to a central bank statement in Mumbai on Wednesday. The outcome was predicted by only eight of 44 economists in a Bloomberg survey, while 31 expected a cut to six per cent and five saw a reduction to 5.75 per cent.

The yield on government notes due September 2026 jumped 21 basis points (bps) to 6.41 per cent in Mumbai, prices from RBI’s trading system show. That’s the biggest increase for a benchmark 10-year security since September 2013, data compiled by Bloomberg show. The rupee strengthened 0.4 per cent to 67.6350 a dollar in a seventh day of gains, its longest winning streak this year.

“Bonds are reacting negatively, as a rate cut and some liquidity easing was priced in by the market,” said Gopikrishnan M S, Mumbai-based head of foreign exchange, rates and credit for South Asia at Standard Chartered Plc.

Consumer price inflation slowed to a 14-month low in October, spurring bets for monetary easing. Calls for a rate cut intensified as the government’s shock November 8 move to invalidate 86 per cent of India’s currency in circulation threatened to dent demand in the cash-driven economy. Global banks including Credit Suisse Group AG, and Deutsche Bank AG slashed full-year growth forecasts for Asia’s third largest economy.

While “supply disruptions in the backwash of currency replacement may drag down growth this year, it is important to analyse more information and experience before judging their full effects and their persistence,” RBI said in a statement.

Bonds surged in the run-up to the policy decision as the currency recall saw citizens rushing to banks to deposit the defunct notes, flooding the financial system with cash and boosting demand for debt. The 10-year yield sank 55 bps in November. The RBI on Wednesday said it would withdraw the temporary increase in lenders’ cash reserve ratio requirement that it announced last month.

“Globally, the imminent tightening of monetary policy in the US is triggering bouts of high volatility in financial markets, with the possibility of large spillovers that could have macroeconomic implications for” emerging-market economies, according to the RBI’s statement.