10-year bond yields hit 18-month high on RBI’s taper

The yield on the 10-year government was 6.307% – a level last seen on 17 April 2020. The yield had come down to 6.267% on Thursday. Bond yields and prices move in opposite directions.

The Reserve Bank of India (RBI) said that it will resume buying if needed.

On Friday, the central bank’s Monetary Policy Committee (MPC) did not change the repo rate for the eighth time in a row and maintained a liberal stance.

The MPC voted 5-1 to maintain an accommodative stance for as long as necessary to revive and sustain growth on a sustainable basis, keeping inflation within the target.

Meanwhile, the Indian rupee weakened by 75 points to hit a low of 75.16 per dollar, down 0.35% from its previous close.

“We expected a taper. But the RBI suspended its purchases under its government securities acquisition program – a swift move to hedge against any future inflationary effects of the recent surge in banking system liquidity. It also marks a reversal from our earlier stance of keeping long-term sovereign bond yields under control, said Abhishek Gupta, Indian Economic Research, Bloomberg Economics.

“With inflation subsiding for now and a sustainable growth recovery still not assured, we suspect the decision to suspend QE is a harbinger of an impending rate hike,” Gupta said.

The primary reason for suspending its asset purchases was the excess liquidity in the banking system, which is estimated ₹13 trillion.

According to Aditi Nair, Chief Economist, ICRA, “With the status quo on rates amid the pause in the G-SAP programme, we now expect the 10-year G-Sec yield to be in the range of 6.25-6.4% in the balance of this quarter. , unless there is a substantial amount of OMO purchases in this bucket, and crude oil prices do not fall below $70 a barrel.”

RBI said additional measures have been announced to absorb liquidity under the additional 28-day convertible reverse repo rate as well as the 14-day convertible reverse repo rate, if required. Analysts said the measures taken do not address sustainable absorption of surplus liquidity volumes.

“In the absence of sustainable absorption, it is unlikely that short-end rates will directly approach policy rates. Market direction is expected to remain volatile as additional measures remain plentiful. Even in the near-term. While domestic CPI prints may provide some relief, external factors such as commodity prices and reluctance of monetary accommodation globally may lead to imbalances,” said Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund.