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Government bond yields rose to a seven-week high due to concerns that rate cuts by the Reserve Bank of India (RBI) will get delayed. Earlier there were expectations in the market that the central bank may cut the repo rate after the budget ahead of the next review of RBI's monetary policy on April 7.
The yield on the 10-year benchmark bond ended at 7.75 per cent on Tuesday compared with its previous close of 7.74 per cent. The yield had ended at 7.77 per cent on January 14, 2015.
“Rise in yields are due to traders offloading their positions and concerns that rate cuts by RBI could get delayed,” said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund.
Yesterday RBI governor Raghuram Rajan once again flagged concerns on high inflation."We have got an avalanche of capital inflows. Our problem is, we also have high inflation so we cannot cut interest rates to the bone in order to tell those countries - don't come here expecting high interest rates," Rajan said addressing the students of Guru Nanak College in central Mumbai.
CPI-based inflation for January 2015 stood at 5.1 per cent. The finance ministry and RBI has agreed to put in place a monetary policy framework to focus on flexible inflation targeting, something the central bank has been pressing for.
“The yield on the 10-year benchmark bond may continue to remain high and the bias is towards yields inching up to 7.80 per cent in the next few days. The next trigger for the bond market is the CPI inflation data for February to be released next week,” said a bond trader with a state-run bank.
CPI inflation targets below six per cent by January 2016 and four per cent from 2016-17, with a band of plus/minus two per cent — are in line with the recommendations of a panel headed by RBI deputy governor Urjit Patel. The panel was set up to suggest ways to reform monetary policy.
Even the Union Budget announced on Saturday failed to cheer the market in terms of faster rate cuts by RBI. Though Finance Minister Arun Jaitley will achieve the fiscal deficit target of 4.1 per cent of Gross Domestic Product (GDP) for FY15, but for the next fiscal the deficit is seen marginally higher at 3.9 per cent of GDP compared with 3.6 per cent envisaged earlier.
In January RBI began the rate cutting cycle with a 25 bps cut in the repo rate to 7.75 per cent. At that time Rajan had said that key to further easing will depend on data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure.
