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Wednesday, June 29, 2022
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    HomeBusinessYield spurts to 3-year high of 7.51%, markets nervous ahead of policy

    Yield spurts to 3-year high of 7.51%, markets nervous ahead of policy

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    Experts observed that since the out-of-cycle hike in the repo rate in early May, the market’s expectations on rate hikes have become somewhat unanchored.

    Yields on the benchmark bond rose on Tuesday hitting another three-year high of 7.5180%, a day ahead of the Reserve Bank of India’s monetary policy announcement, with the bond markets anticipating steep hikes in the repo rate over the next few months.

    Experts observed that since the out-of-cycle hike in the repo rate in early May, the market’s expectations on rate hikes have become somewhat unanchored. They said the overnight interest rate swaps are indicating a terminal rate of somewhere close to 7% for the repo by April next year.

    It would help if the RBI gives us some colour on the character of inflation and some indication of the extent of tightening that might be needed,” Suyash Choudhary, head – fixed income at IDFC AMC, said. Choudhary believes a clear narrative on inflation would help calm the markets. He said the market right now is probably pricing in a steeper trajectory than the RBI might want to indicate.

    R Sivakumar, head – fixed income, Axis Mutual Fund, observed the central bank would want to take enough steps to tame inflation before October, when it must explain to Parliament why inflation had breached the upper end of the target band for three consecutive quarters. “RBI would need to decide how much of a rate hike is needed and how soon it should be done because monetary policy typically acts with a lag of about two-three quarters,” Sivakumar said.

    Pranjul Bhandari, chief economist India at HSBC, wrote in a note that she expects inflation, one year ahead, in 2023-24, at 5.5% and repo rate at 6%. “That would mean that the real policy rate is at a positive 0.5%, which we believe would be appropriate. Our sense is that real neutral rates are in the 0.5-1% range,” she observed. Bhandari expects a 40-bps hike in the repo now, taking it to 4.8%. “Thereafter, we expect a series of smaller quantum rate hikes, taking the repo rate to 6% in mid-2023,” she said.

    Bhaskar Panda, executive VP & head, overseas treasury, HDFC Bank, believes a 40-bps hike in June could be followed up with a 25-35-bps hike in August. Panda expects the yield to move in the range of 7.5-7.75% over the next six months.

    In an off-cycle meeting early May, the RBI had raised the repo by 40 bps to 4.4% and the CRR by 50 bps, taking it 4.5% of net demand and time liabilities, in a move that impounded some Rs 87,000 crore of liquidity.

    The markets are expecting some relief measures related to the HTM or hold-to-maturity segment of banks’ bond portfolios. They are hoping the cap on the segment will be raised from 23% at present.

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