The euphoria over bonds turned out to be short-lived, with the Reserve Bank of India (RBI) deciding not to drop its guard against inflation.
Yesterday, RBI Governor D Subbarao had said inflation was still high and there was little room for monetary or fiscal stimulus.
On Wednesday, yields on the 10-year benchmark government bond rose by five basis points to close at 7.88 per cent. On Monday, it had touched a 30-month low of 7.80 per cent, after headline inflation eased, albeit marginally, which made traders bet on a 50-basis point cut in the repo rate. Earlier, the market had expected a 25-basis point rate cut in RBI’s third quarter review of monetary policy, to be announced on January 29.
“When growth is slowing, you can stimulate the economy by monetary easing or by fiscal stimulus. But, both monetary and fiscal sides have no room for stimulus. So, that is the big concern,” Subbarao had said in Lucknow yesterday.
No announcement on the purchase of government bonds through open market operations was another factor behind the rise in bond yields, bond dealers said.
The yield on the 10-year benchmark bond had started falling since December 21 (when it stood at 8.14 per cent). The Street had expected, as January 29 neared, the yield might drop to 7.70 per cent.
On Wednesday, the rupee also weakened, closing at 54.69 against the dollar, against its previous close of 54.63.
Data released on Monday showed in December, Wholesale Price Index-based inflation fell to 7.18 per cent from 7.24 per cent in November. This had triggered hopes of a 50-basis point cut in the repo rate. Currently, the repo rate is eight per cent.
“Now, there is a feeling the 50-basis point repo rate cut may not materialise. Earlier, the market was quite hopeful about it,” said the treasury head of a public sector bank.
“The yield on 8.15 per cent 2022 may rise further on Thursday and reach 7.90 per cent,” said a gilt dealer with a public sector bank.
This financial year, RBI had cut the repo rate just once — in April, it had announced a 50-basis point cut. It is expected in the third quarter review of monetary policy, it may opt for a 25-basis point cut.
