Monetary policy: Bond yields soften after RBI hits pause on rate hike

The 10 year g-sec yield is expected to be at 7.0 per cent as against 7.21 per cent currently by end March 2024

Bond markets rallied on Thursday and the yield on the 10-year benchmark government security (G-Sec) softened by 8 basis points (bps) to 7.2 per cent after the Reserve Bank of India’s (RBI’s) Monetary policy Committee (MPC) decided to keep the policy repo rate unchanged at 6.5 per cent, in a surprise move.

Data from the National Clearing Corporation of India showed that the closing yield on 10-year G-Sec was 7.20 per cent as against 7.28 on Wednesday.

In a report, QuantEco Research said since market participants were pricing in a 25 bps rate hike in the policy review, the first in financial year 2023-24 (FY24), the maintenance of status quo sparked a rally in bonds.

 

Ajay Manglunia, managing director of JM Financial, said the easing of yields indicated that the market was comfortable with the RBI’s action. The guidance for consumer price index (CPI)-based inflation for all four quarters of FY24 was within the upper end of the RBI’s inflation target of 4 per cent, with a margin of 2 per cent either side.

The yield on the benchmark (10 year) is expected to remain in the 7.10-7.30 per cent range till the June policy review, barring some developments in the global markets.

The 10-year G-Sec yield is expected to be at 7 per cent by the end of March 2024, as against 7.21 per cent at present. A prolonged pause on monetary policy action provides a downward bias to long-term yields, QuantEco said.

Abheek Barua, chief economist of HDFC Bank, said for the 10-year yield could see some pressure return once the government’s borrowing programme kicks off and a range of 7.20-7.30 per cent is likely in the first quarter.

G-sec yields were largely range bound in the second half of FY23. Yields hardened in October, tracking higher-than-expected domestic CPI inflation for September. They moderated in November, taking cues from the softening of yields in the US with a lower-than-expected US CPI print and declining crude prices. Overall, the 10-year benchmark yield softened by 7 bps in Q3 to close at 7.33 per cent, RBI said in its monetary policy report.

In Q4FY23, yields softened in early February on a lower-than-anticipated market borrowing programme of the central government for FY24. They hardened subsequently on higher domestic and US inflation prints and stronger US economic data. In March, the yields softened, taking cues from US yields after the collapse of some banks abroad, which drove investors to safe assets. Overall, the 10-year benchmark yield fell by 3 bps to 7.31 per cent at the end of March, the RBI said.