After hitting a three-and-a-half-year high on Tuesday, the benchmark 10-year Indian bond yield fell about 3 basis points to 7.491% on Wednesday, despite a 50 basis point increase in the repo rate by the RBI’s Monetary. policy committee. The increase is lower than what some traders expected as some of them believed that the RBI will also increase the cash reserve ratio to suck more liquidity out of the system due to high inflation.
The yield on the 10-year benchmark of 6.54 percent 2032 paper fell to 7.491 percent on Wednesday, down 3 basis points from the 7.52 percent recorded Tuesday. Bond yields fall when the price rises.
ICRA chief economist Aditi Nayar said: “While further rate hikes are clearly on the table, with reference to the revised 4.9 percent repo rate remaining below pre-pandemic levels, the comment about the orderly completion of the government loan program served to 10-year G-sec yield to cool.”
The repo rate is the rate at which the RBI lends money to commercial banks while the CRR is the percentage of cash that banks are required to hold in reserves relative to their total deposits.
Nayar added that she foresees further repo increases of 35 bps and 25 bps respectively in the next two policies. However, the increase in yields will now be somewhat more superficial than previous expectations, she added.
When asked whether the decline in bond yields could affect inflation or liquidity, Madan Sabnavis, chief economist at the Bank of Baroda, told news18.com: program that happens every Friday. The movement in bond yields generally does not affect the amount of loans.”
However, a change in benchmark yield prompts bankers to change their interest rates on both deposits and loans.
The RBI’s Monetary Policy Committee on Wednesday decided to raise the key repo rate by 50 basis points to 4.90 percent. It also decided to remain focused on housing withdrawals to ensure inflation remains within target in the future while supporting growth.
The central bank also revised its retail inflation forecast up 100 basis points to 6.7 percent for the current fiscal year 2022-2023, from the previously projected 5.7 percent. Retail inflation reached an eight-year high of 7.79 percent in April. However, the RBI is mandated to keep it within 2-6 percent.
Crisil Chief Economist DK Joshi said: “Bond yields fell today (Wednesday) following the Monetary Policy Committee’s hike in repo rates. It could be positive news for the economy, as the cost of borrowing falls with bond yields falling.”
What are bonds and their yields?
A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (usually a company or government). Bonds are used by corporations, municipalities, states and sovereign governments to fund projects and operations. In India, 10-year government bonds (G-Sec) are the benchmark for government bonds. Returns are the return on bonds. The movements of bond yields and prices are opposite to each other. When bond prices rise, yields fall and vice versa.
Read all the latest news, breaking news and IPL 2022 Live Updates here.