Will bond yield volatility affect RBI's policy decision?

Money markets have been nervous since the announcement of the Budget on February 01.
High borrowing numbers in the Budget as well as absence of any steps to facilitate global bond index inclusion roiled the domestic markets, pushing the yield on the benchmark debt to two-year high of 6.8%.
This comes at a time when global central banks – the US Federal Reserve and the European Central Bank – are looking to hike rates soon. Bank of England, on the other hand, has already hiked rates.
 
And, this edginess in the bond markets may make Shaktikanta Das’S task more challenging. India’s central bank may stick to baby steps for policy normalisation, as it is seized by the need to anchor borrowing costs for the government in addition to supporting a durable recovery in Asia’s third-largest economy.
Those objectives could also make the benchmark interest-rate a sideshow at today’s monetary policy outcome.

“G-sec market shows nervousness around impending policy actions and a possible supply-demand mismatch in the absence of RBI. Against this backdrop, even a reverse repo hike or a stance change could disturb the market further. Thus, cautious policy treading and communication will be the key,” says Madhavi Arora, Lead Economist at Emkay Global. 

On the other hand, Joydeep Sen, an independent market analyst, believes the RBI may think twice before hiking the reverse repo rate today.

Meanwhile, earlier this week, the government cancelled all bond auctions scheduled for February 11 which, analysts said, could help soothe market nerves.
But a huge supply next fiscal will require the RBI’s invisible hand in a more visible fashion, implying return of pre-committed G-sec Acquisition Programme.

Nonetheless, analysts and the Street are baking-in, at most, a 25-basis point hike in reverse repo rate along with holding the accommodative stance.

Given the policy outcome, market participants should expect a volatile day today with choppiness high in rate sensitive counters like banking, NBFCs, auto and real estate.
That apart, stock-specific action amid Q3 results will also sway the indices. Over 300 companies, including GSPL, Hero MotoCorp, Tata Chemicals, MTAR Tech and M&M are slated to report their results later in the day.
Yesterday, the BSE Sensex advanced for a second straight day and ended 657 points higher at 58,466. The Nifty50, on the other hand, closed at 17,464.

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