Bond yields jump after RBI signals no halt in battle against inflation

RBI

The government's 10-year bond yields jumped 6 basis points on Thursday after the Reserve Bank of India on Wednesday signalled that it will remain focused on inflation.

The 10-year bonds yields traded at 7.301 percent from its previous close of 7.247 percent. The five-year bond yield gained 8 basis points to 7.187 percent, while one-year bond yields stayed flat at 6.85 percent.

This was the fourth straight session when both the five and 10 year bond yields traded in the green. Bond yields and prices move in opposite directions, while rupee strengthened 0.2 percent to 82.28 to a dollar on Wednesday.

"We will keep Arjuna's eye on inflation and we will be ready to act. Our actions will be nimble," RBI Governor Shaktikanta Das said in his speech on the Monetary Policy Committee decision.

The rate-setting panel of the central bank raised the key repo rate by 35 basis points (bps) to 6.25 percent in its last meeting this year, continuing with its fight against inflation. The MPC retained its focus on withdrawal of the accommodative stance that indicates the tilt is largely towards a rate cut.

"The Reserve Bank of India’s smaller rate hike was far from a dovish policy pivot. The central bank’s decision to stick to its 'accommodation withdrawal' stance raises the risk that it might even raise rates into the restrictive territory. Stubbornly high core inflation and recent weakness in the rupee is likely to have tilted the decision in favour of a hawkish bias despite slow overall price gains and softening demand," said Abhishek Gupta of Bloomberg economics.

India's headline retail inflation rate fell to a three-month low of 6.77 percent in October from 7.41 percent in the previous months on a favourable base but stayed above the central bank's upper tolerance band of 6 percent.

Traders are now awaiting the US Fed meeting after the recent data suggested that the US services industry, contributed more than expected on the employment front. Stronger data could give the Fed the reason to continue on its rate path for longer, analysts expect.

"The inflation guard stays in place. Key lies in the FOMC outcome in the coming week. Expect bond markets to give up some gains and trade range bound as global growth concerns dominate," said Lakshmi Iyer, CEO- Investment Advisory, Kotak Investment Advisors.