India’s benchmark 10-year bond yield rose to its highest level in three years ahead of the Reserve Bank of India’s policy announcement tomorrow. India’s benchmark 10-year bond yield rose to 7.53%, up 4 basis points from the previous close, the highest since March 2019. Bond yields are inversely related to yields. After raising its prime lending rate or repo rate by 40 basis points last month, the RBI is widely expected to hike the rate again tomorrow.
The rise in yields indicates that traders expect the RBI to increase the repo rate sharply going forward. Economists expect the Reserve Bank of India (RBI) to hike policy rates by 50 bps on June 8.
Several banks have raised the marginal cost of repo-linked and fund-based lending rates (MCLR) since the RBI’s surprise rate hike in May, thereby increasing the cost of borrowing for retail customers.
Apart from the quantum of rate hike, market observers will also be watching RBI’s comments on growth and inflation, with oil prices rising above $120 a dollar.
A fund manager said that the market is expecting a rate hike of 40-50 bps tomorrow and any small rate hike would be a positive surprise, and there could be a marginal reduction in short-term bond yields.
“Two important figures coming out this week are important – RBI rate hike tomorrow and US inflation rate expected on Friday. RBI’s rate hike is a foregone conclusion; “The quantum of the rate hike is simply unknown,” said VK Vijayakumar, chief investment strategist, Geojit Financial Services.
“The rising rate scenario will improve margins of the banking sector as deposit rates lag behind lending rates. The most attractive valuable segment in the market now is financials, especially banking,” he said.
market Outlook
“Domestic and global inflation levels will determine the performance of equity markets over the next few months—(1) peaking inflation figures may place a cap on bond yields and a floor on equity valuations but (2) Data showing further growth in inflation: Prolonged inflationary expectations could lead to a further rise in bond yields and a correction in the markets. We expect inflation in India to sharply bottom out on higher base effects in 2HFY23. However, take into account the risk of higher inflation than expected domestic food prices and global fuel prices for inflation,” Kotak Institutional Equities said in a note.
What should bond market investors do?
Edelweiss Mutual Fund says, “The bond market will experience some volatility as market participants re-evaluate the impact of RBI’s expected hike and other financial assets over the next 12 months.”
“Investors with long-term fixed income allocation should probably wait till the June MPC policy and allocate a portion of their surplus (25%) after the June MPC results and 25% each after the MPC policy results.” Target maturity funds should have a residual maturity of 10 years depending on their comfort. This will help them average out their investments and earn attractive tax-adjusted returns if they stay invested in these funds till maturity.”
Target maturity funds are passive debt funds that track an underlying bond index. The portfolio of such funds includes bonds that are part of the underlying bond index, and the maturity of these bonds is around the fund’s declared maturity. The bonds in the portfolio are held until maturity and all interest payments received during the holding period are reinvested in the fund.
progress of monsoon
Rahul Bajoria, MD and Chief India Economist, Barclays, says that while this year’s southwest monsoon made an early onset on May 29, the progress of rains needs to be closely tracked as inflation fears continue to rise. has been
“The combination of early onset of monsoon and healthy progress can help in sowing, and ease inflationary pressures in the economy.”