MPC 3-Day Meeting Begins: Bond Yields Hit 3+-Year High


Even as the Reserve Bank of India’s monetary policy committee began its three-day meeting on Monday, yields on benchmark 10-year bonds rose above the 7.5% level in intraday trading on Monday before closing at 7 .49%, the highest levels since January 2019.

With a repo rate hike of 40 to 50 basis points predicted, bond markets are bracing for hawkish comments, experts said. Meanwhile, the US Treasury yield has risen over the past five sessions and was trading 5 basis points at 2.9% on Monday evening.

Bhaskar Panda, executive vice president and head of overseas treasury, HDFC Bank, believes a 40 basis point hike in June could be followed by a 25 to 35 basis point hike in August. “It is possible that the cash reserve ratio could also be increased by around 25 basis points now, but the position should remain dovish,” he said. Panda expects the yield to move in a range of 7.5-7.75% over the next six months.

In an off-cycle meeting in early May, the RBI raised the repo by 40 basis points to 4.4% and the CRR by 50 basis points, taking it 4.5% of net demand and forward commitments, in a move that confiscated some Rs 87,000 crore of liquidity.

The long yield is now up around 175 basis points from the October 2020 low, while the repo is up 40 basis points.

Mahendra Jajoo, CIO, Mirae Asset Management, believes there could be a further CRR hike of around 50 basis points, but possibly in phases. “The RBI would seek to reduce excess liquidity to levels of around Rs 2 trillion, possibly by October, from levels of around Rs 3.5 trillion currently,” he said. declared. Jajoo said the RBI was unlikely to conduct open market operations before the second half of the year and would likely wait for more visibility on crude oil prices and the path of inflation.

Economists’ inflation forecast for FY23 ranges between 6.6% and 7.2%, with the rate decreasing towards the end of the year. Based on the 6% rate on 1-year Treasury bills, the market appears to have priced in a maximum repo rate of around 6%, implying additional repo rate hikes of 160 bps.

Astha Gudwani and Mohammed Faiz Nagutha, economists at BofA Securities, wrote recently that it was important for the RBI to leave ultra-accommodation by August and bring the political repo rate back to the pre-pandemic level of 5.15% . “As a result, until then, we expect the MPC to maintain a dovish stance while focusing on the withdrawal of accommodation. Going forward, as inflation continues to remain elevated, we see the RBI MPC raising the political repo rate to 5.65% by March 2023,” they wrote.


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