Dec 06, 2017 09:37 PM IST | Source:

Bond yields not seen rising much despite RBI revising inflation forecast

The RBI maintained its neutral stance on liquidity and raised its inflation forecast for the second half of the current fiscal year to 4.3-4.7 percent.

Yields of government bonds are unlikely to rise much in the short term, despite the Reserve Bank of India (RBI) keeping its policy rate unchanged and revising its inflation forecast upward, as the bond market is now likely to look for pointers from the country's fiscal policy, dealers said.

The Indian rupee, on the other hand, took a bit of a hit because of the revision in the central bank's inflation forecast, and increased demand for the dollar from importers dragged it down further.

The local currency on Wednesday depreciated 0.2 percent against the dollar after the RBI kept its key policy repo rate unchanged at 6 percent.

The central bank’s decision came amid concerns of inflation topping its medium-term target of 4 percent. The decision was in line with market participants’ expectations as not many expected a revision in rates this time around.

Starting the day on a slightly weaker from its overnight closing level, the rupee remained steady for most of the session, rising marginally after the RBI’s policy statement. Intraday, it touched a high of 64.39 and a low of 64.54 against the greenback, before closing at 64.52.

The RBI maintained its neutral stance on liquidity and raised its inflation forecast for the second half of the current fiscal year to 4.3-4.7 percent.

Meanwhile, the bond market took the news of a status quo policy with a pinch of salt. The 10-year benchmark government bond yield fell three basis points to close at 7.03 percent, after having already factored in an unchanged policy rate.

“The policy was on expected lines and less hawkish with the MPC noting some growth concerns, though they reiterated their stance of maintaining inflation near the medium term target of 4 percent. The bond market is likely to get some support here. Government clarification on fiscal policy is likely to drive bond markets in the near term,” said Avnish Jain, Head–Fixed Income, Canara Robeco.

Speaking to CNBC TV18 after the MPC press meet, HDFC vice chairman and CEO Keki Mistry also said that the policy was largely along expected lines and that inflationary pressures seem to be worrying the RBI at the moment.

“Given that increasing or reducing interest rates at this time was almost an impossible expectation, one should not expect too much of a reaction. I mean in the very short-term you may see some knee-jerk reaction in the bond market, but generally speaking I do not expect bond yields to go much higher from where they are,” Mistry said.

Market watchers were of the opinion that with the RBI policy turning out to be a non-event, the market’s focus will largely shift to fiscal policy. The policy had no cues for the domestic market, which has been dealing with its worst losses in the last four years. Since the central bank didn’t say anything concrete about liquidity management, it is the increasing concern about rising government expenditure that has come to the forefront.

“While the FY18 GVA estimate was maintained and growth has bottomed-out in 2Q, a downward revision remains on the cards. Back on inflation, we expect the headline to settle within a broad 4-5 percent range, with base effects tempering the headline prints intermittently,” Radhika Rao, India Economist, DBS Bank, said in a statement.
Follow us on
Available On