10-year G-Sec touches 7.5% ahead of RBI's monetary policy review

The yield on the 10-year government securities (G-Sec) touched 7.5 per cent on Monday, hitting a three-year high ahead of the Reserve Bank of India’s (RBI’s) monetary policy review scheduled for Wednesday.

The yield jumped 4 basis points (bps) on Monday after Saudi Arabia – the world’s biggest oil exporter – raised prices for Asian buyers. The yield on the 10-year G-Sec, which closed at 7.50 per cent on Monday, was at its highest since January 11, 2019, when it touched 7.59 per cent.

This came even as Brent crude oil prices touched $120 a barrel, leading to fresh concerns over rising inflation as the country imports more than 80 per cent of its crude oil requirements.

Yields on the 10-year bond have surged 105 bps in 2022, and 66 bps in the current financial year.

The six-member monetary policy committee of the RBI, which started deliberations on Monday, will announce its decision on interest rates on Wednesday. The market is expecting a 50-bps hike in the repo rate to 4.9 per cent, while a section of the market is also seeing further liquidity tightening measures with a hike in banks’ cash reserve ratio (CRR) requirement.

“Despite the government’s supply-side interventions to curb price pressures, for the foreseeable inflation trajectory remains skewed closer to 7 per cent,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
 

“We expect the MPC to revise upward the inflation trajectory by 70-80 bps, accounting for the upside price pressures. From the policy withdrawal perspective, the RBI in the last two months has moved quite aggressively and swiftly. The weighted average overnight rates have risen by 80-90 bps since the April MPC meet,” she said. The bank is expecting a repo rate hike of 35-40 bps and status quo on CRR in the June policy.

In a surprise move in May, the rate setting committee hiked interest rate for the first time in three years in an off-cycle meeting. Inflation has become a concern following the Russian invasion of Ukraine. Consumer price index-based inflation accelerated by 7.78 per cent year-on-year in April. Inflation has been higher than 6 per cent – the upper limit of the RBI’s target of 4 per cent plus or minus two per cent – for all four months of 2022.

“Crude has again inched up to around $120/bbl with news of China opening up,” said Anand Nevatia, fund manager, Trust Mutual Fund.

“This combined with geopolitical tensions continue to keep inflation expectations high. We should be prepared for a series of rate hikes as the central bank aims to reach neutral to positive real rates,” Nevatia said.