The yield on the 10-year government bond hit 7 percent on Friday for the first time since June 2019 after the Reserve Bank of India (RBI) at its bimonthly policy review raised its annual inflation forecast and introduce a new tool to absorb cash.
The RBI raised its annual inflation forecast to 5.7 percent from 4.5 percent, which analysts say indicates a rate hike in coming months. It also lowered the growth projection for FY23 to 7.2 percent from 7.8 percent.
The RBI also decided to introduce a liquidity absorption tool at 3.75 percent called the standing deposit facility which will now be the floor of the interest rate corridor. By practically making the reverse repo, which stands at 3.35 percent, redundant, the central bank has effected an indirect tightening of 40 basis points (bps).
The bond yield hit a high of 7.062 percent, a level last seen on June 13, 2019, up 15 bps from its previous close of 6.913 percent. Bond yields and prices move in opposite directions. One basis point is one-hundredth of a percentage point.
“The RBI sounded more hawkish in today’s monetary policy meeting. While maintaining an accommodative stance, it has signalled calibrated removal of accommodation in this fiscal going forward,” said Crisil Research in a note to investors
Also read: CPI inflation projected at 5.7% for FY23, says Shaktikanta Das
The RBI kept borrowing costs at a record low for an 11th straight meeting. The monetary policy committee (MPC) voted to keep the benchmark repurchase rate at 4 percent and retained its “accommodative” stance.
“The focus from now on will be to withdraw the accommodative policy stance to keep inflation in check. Today’s announcement clearly indicates the end of easy monetary policy by the RBI, the same reflected well on the 10-year benchmark yield which hit a multi-year high. The unwinding of liquidity will create some turbulence, and the likely reason for the RBI to lower the growth rate projection for FY23 to 7.2 percent, inflation aim hiked to 5.7 percent from 4.5 percent earlier. The clear aim of the central banks worldwide is to control inflation, unwind easy liquidity and focus on slow and steady growth,” an analysts with a domestic brokerage said.
Also read: Forecasts assume crude oil price at $100 per barrel: RBI Governor Shaktikanta Das
On the record borrowing plans for this fiscal, RBI governor Shaktikanta Das said it will use various instruments to complete government borrowings.
The RBI also said that the country is facing fresh challenges from the Russia-Ukraine war and Covid lockdowns in China, which risk exacerbating a global supply squeeze and price pressures.
(with inputs from Bloomberg)
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