)
Yields on government bonds breached the eight per cent mark on Thursday; they rose for a fourth straight day despite the rate cut of 25 basis points (bps) by the Reserve Bank of India (RBI) on Tuesday. The rise in yields was due to the hawkish stance of the central bank, which indicated a prolonged pause on monetary easing as a poor monsoon threatens to stoke food prices.
Bond yields crossed the eight per cent mark for the first time since December 2, 2014, and have hardened 36 bps since February.
The yield on the 10-year benchmark bond ended at 8.01 per cent compared with the previous close of 7.95 per cent. Since RBI’s move on Tuesday, the yield has risen eight bps. “The RBI policy review was slightly disappointing, as it ruled out further rate cuts in the near future. Besides that, German and US bond yields moved up and, tracking them, there was rise in Indian bond yields. There were also traders selling their portfolio in a bid to make space for tomorrow’s (Friday’s) auction. Combination of these factors have resulted in weakness in the market,” said Badrish Kulhalli, head of fixed income at HDFC Life.
RBI Governor Raghuram Rajan highlighted three key concerns which could impact inflation going forward. According to him, the Indian Meteorological Department has predicted a below-normal southwest monsoon due to which astute food management was needed to mitigate possible inflationary effects. In the past, softening crude oil prices had contributed to easing inflation. But, according to Rajan, in recent times crude prices have been firming amid considerable volatility, and geopolitical risks are ever present. Besides, volatility in the external environment could impact inflation, Rajan had said.
When asked about hardening of domestic bond yields, Rajan had said yields were also influenced by international yields. “In the near term, volatility may persist in the bond market. But whenever global environment stabilises and there is more certainty on the monsoon front, some bond buying may emerge. The new 10-year bond may trade in the range of 7.70 to 7.90 this month and the bias is towards yields rising,” said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund.
The broad expectation on the Street after the monetary policy is that the next rate cut may happen only in the fourth quarter (January-March 2016) of the current financial year. The yield on the new 10-year bond ended at 7.80 per cent, compared with the previous close of 7.74 per cent.
