Where are the bond markets headed as RBI mulls rate hikes?

The Reserve Bank of India front-loaded with a 50-basis point repo rate hike on Wednesday, as it expects retail inflation to stay above the 6% tolerance level for three more quarters.
While the markets were expecting a rate hike anywhere between 25 bps to 75 bps, the Monetary Policy Committee’s pitch for a high number indicates that more hikes are coming.

In the fixed income market, the yield on the 10-year government bonds retreated to 7.49% on Wednesday, only to climb back above the 7.5%-mark on Thursday. 
The whipsaw in bond yields reflects the nervousness in the bond market given considerable policy tightening expected from the US Federal Reserve, and the RBI.
 
According to QuantEco Research’s Vivek Kumar, 10-year G-Sec yield could crawl to 8% over the next few months, before moderating a bit by end of FY23 on the back of moderate fiscal consolidation in FY24, and most central banks approaching peak in their respective hiking cycle.
 
Speaking to Business Standard, Vivek Kumar, Economist, QuantEco Research says high inflation to expedite withdrawal of policy accommodation. Global monetary environment is hostile and he expect 75-bps hike in repo rate; 50-bps in CRR through FY23. Ten-yr bond yield may hit 8% in near-term.
 
Edelweiss Securities, meanwhile, expects the 10-year bond yield to hit a peak of 7.75% as the RBI intends to ensure an orderly conduct of the government’s borrowing program.
Given this, the brokerage expects the RBI to resort to Open Market Operations ahead to calm G-sec market.
  
As a result, equity valuations may be eyeing downgrades in the near-term.
 
G Chokkalingam, Founder, Equinomics Research hints that Sensex may hit 52,000 (worst case) by December 2022. RBI, US Fed have just begun interest rate reversals. Complete discounting of tightening cycle likely in 2-4 months, he says.
 
Analysts suggest investors stick to low debt businesses, invest in funds having maturity of 2-3 years, and/or dynamic bond funds.
 
Chokkalingam of Equinomics Research says one should not make fresh leveraged investments. Instead, sit on cash to the extent of 5-10% equity asset class. He suggests one should bet on high value, dividend yielding stocks. Top 250 stocks, with DII support, look attractive.
 
On Friday, the European Central Bank’s interest rate decision, and the US’ jobs data will be the key factors driving the markets.
That apart, brent crude prices, rising Covid-19 cases, and the US inflation data will also be on investor radar.