Both short-term and long-term rates have risen sharply, increasing overall financing costs.
The benchmark bond yield rose 16 basis points on Friday to 7.07%, the highest level since June 10, 2019, Bloomberg data shows. When bond yields rise, prices fall.
The surge in yields was most pronounced in shorter duration paper, with five-year sovereign debt securities gaining 20 basis points to 6.60%.
One basis point equals 0.01%.
“This policy has brought the much desired clarity to the markets, which have clearly priced in a 40 basis point rate hike,” said A Balasubramaniam, CEO of Aditya Birla Mutual Fund. “As rates now rise across the board, this will not weigh on sovereign borrowing.”
North Block will borrow Rs 8.45 lakh crore in the first half, or 60% of the total market borrowing planned for the financial year.
The weighted average overnight call rate (WAR) jumped 33 basis points to 3.59%. Banks lend and borrow from each other using the interbank overnight money rate.
“In the absence of adequate credit demand, sovereign papers will find sufficient investor demand,” Balasubramaniam said.
RBI Governor Shaktikanta Das said the central bank was prioritizing inflation over growth, a phenomenon that was justified following the Russian-Ukrainian war, which skyrocketed world crude oil prices. India, being one of the largest oil importers, suffers from higher prices whenever world crude prices increase.
Although the Monetary Policy Committee left the policy and accommodative stance unchanged, it raised the inflation forecast by 120 basis points for the fiscal year to 5.7% from 4.5% citing rising raw material prices. This is widely seen as a rate hike and a shift in stance, dealers said.
“Debt markets are adjusting to the RBI’s inflation projections amid geopolitical uncertainties,” said Naveen Singh, head of trading at ICICI Securities PD. “It is now clear that we are headed for a hard interest rate regime with the central bank clearly stating its intention.”
“Furthermore, the narrowing of the corridor has impacted all shorter-duration bond yields and money market rates,” he said.
Overnight Indexed Swap (OIS), a derivative interest gauge, jumped 21 basis points to 4.01% for its three-month contract, the highest level since April 21, 2020, Bloomberg data shows. The one-month gauge increased by 16 basis points.
It narrowed the liquidity adjustment facility corridor by fixing the standing deposit facility (SDF) rate at 3.75%. The marginal standing facility, on the other hand, is at 4.25%, which helps reduce the corridor to 50 basis points.
Economic growth forecasts have been cut to 7.2% from 7.8% as supply disruptions reduce production and high prices destroy demand.