Bond yield rises to 2-week high on RBI rate hike concerns

Bond market experts, however, anticipate a rate hike of 25 bps either in the upcoming June 6 monetary policy or in the August policy. They expect the central bank’s stance to harden. Economists believe the monetary policy committee could consider a shift from ‘neutral’ to a ‘withdrawal of accommodation’.

Sonal Varma, chief India economist at Nomura wrote the economy is experiencing a strong cyclical recovery, having dusted off the twin shocks of demonetisation and implementation of the goods and services tax. Moreover, consistent with increased domestic demand, core inflation has risen.

“The jump in services inflation in April looks particularly alarming and possibly reflects a release of pent up inflation pressure at the start of the new financial year in a rapidly formalising economy,” Varma observed. Ajay Manglunia, executive vice-president and head of fixed income at Edelweiss Securities believes it is very difficult to predict the direction of the benchmark yield at the moment. “The market is slightly nervous and uncertain ahead of the policy and the investors’ risk appetite has reduced because of which they want to stay light and take a safe bet,” he said.

The old benchmark bond, 6.79 per cent yielding notes maturing in 2027, touched an intra-day high of 7.94 per cent and closed at a level of 7.91 per cent. The LAF borrowing from the beginning of April earlier this year has ranged from Rs 3,210 crore to Rs 17,237 crore. The RBI conducted OMO purchases worth Rs 10,795 crore from the beginning of February, 2018 till May 25.