India’s sovereign 10-year bond yields today breached the 7.5% level for the first time in three years as the Reserve Bank of India's rate-setting panel began its three-day meeting. Benchmark 10-year yield rose as much as four basis points to 7.5%, a level was last seen in 2019. The RBI will decide on its rate decision on Wednesday and a majority of economists surveyed by Bloomberg predict a 50 basis-point increase in the repurchase rate.
India benchmark bond yields have jumped by more than 100 basis points this year amid global tightening and as the Reserve Bank of India turned hawkish with an out-of-turn rate hike last month.
Bond traders are concerned higher oil prices will add to India’s already elevated inflation and push the central bank toward more aggressive rate hikes. India imports three-fourths of its oil needs, and higher prices threaten to accelerate inflation that has stayed above the higher end of the RBI’s 2%-to-6% target for four consecutive months.
“We expect the RBI to hike repo rate by 40 bps in the June policy meeting. However, we should be open for a rate hike between 35-50 bps hinging on how the MPC wants to reach the pre-pandemic repo rate of 5.15% or around that mark by the end of the August policy. The RBI is likely to hike the CRR in one of the upcoming policies but will be contingent on how it sees the the durable liquidity panning out over the next few months," said Suvodeep Rakshit, Senior economist at Kotak Institutional Equities.
"We expect another 50 bps of CRR hike by end-FY2023. Along with the repo rate hike, the RBI will also revise its inflation estimates higher, possibly indicating inflation remaining close to 7% for most part of CY2022. We expect the RBI to continue focusing on taking inflation and signaling its intent to continue raising rate and normalising liquidity, while not entirely losing its on growth given the uneven nature of growth recovery."
Last month, in a surprise move, the RBI raised its main lending rate off record lows to 4.40%, in its first change in the rate in two years and its first rate hike in nearly four years. The central bank also raised banks' cash reserve ratio (CRR), or proportion of deposits that banks need to set aside with the RBI as cash, by 50 basis points to 4.50% effective from May 21.
“The MPC has signalled a gradual withdrawal of accommodation in light of higher inflation. It is likely that the RBI's stance will be “Neutral" while it will stay committed to bringing back inflation closer to the targeted levels through all possible instruments. I expect a rate hike between 35-50 basis points in the June policy," said Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank Ltd.
"Based on inflation data and external factors, including oil and commodity prices, expect a total of 100 to 150 bps increase in repo rate from the current 4.40%. However, it is important that fiscal and monetary policies move in tandem to bring inflation within targeted levels and provide support to economic growth."