The 10-year government bond yield surged nearly 30 basis points, the biggest jump in five years, on May 4 after the Reserve Bank of India surprised everyone with a hike in key policy rate.
At 3 pm, the 10-year bond yield was at 7.383 percent, a level last seen on May 13, 2019. The yield jumped 30 basis points, its biggest gain since February 8, 2017. Bond yield and prices move in opposite directions.
RBI governor Shaktikanta Das announced a 40 basis point hike in the repo rate, the rate at which the RBI lends short-term funds to banks, to 4.4 percent and the cash reserve ratio (CRR) by 50 bps to 4.5 percent. One basis point is one-hundredth of a percentage point.
The decision spooked investors, as the benchmark Sensex ended 1,307 points lower at 55,669, while the Nifty lost 392 points to close at 16,677. The rupee, however, strengthened 0.25 percent to 76.38 a dollar.
"Bond yields were driven sharply higher as the RBI’s mid-cycle rate hike and CRR hike fuels expectations of further policy normalisation steps,” said Radhika Rao senior economist at DBS Bank.
“The move is also intended to keep inflationary expectations anchored, in midst of persistence of food price pressures, spill over of rising imported commodities, including edible oil, wheat, fertilisers and fuel, and improving pricing power amongst bigger corporates, just as advanced economies also frontload tightening moves.”
Also read: Closing Bell: Sensex tanks 1,307 pts, Nifty below 16,700 as RBI stuns with a rate hike
The hike in CRR will force lenders to park more money with the RBI and leave them with less to loan to customers. The central bank said it will suck out around Rs 87,000-crore liquidity from the banking system.
" Today's surprise repo rate and CRR hikes are very well-timed, as our own CPI inflation projection for April 2022 is an eye-watering 7.4 percent,” said Aditi Nayar chief economist at ICRA.
By advancing the rate decision by approximately one month, the monetary policy committee focused on preventing inflationary expectations from “unanchoring in an increasingly uncertain environment”, she said.
The committee displayed nimble-footedness and clearly completed the pivot back to inflation management.
"If the US Fed's decision tonight is more hawkish than expected, then the 10-year Gsec yield could test 7.5 percent as early as tomorrow; this is the cap that we had foreseen for H1 FY2023,” Nayar said.
The decision should be seen as part of the central bank’s April announcement of gradual withdrawal from the easy money regime, Das said.
“The decision today to raise the repo rate may be seen as a reversal of rate action of May 2020. In last month, we had set out a stance of withdrawal of accommodation. Today’s action needs to be seen in line with that action,” the RBI governor said.
The move came ahead of an expected rate hike from the US Federal Reserve and in the backdrop of retail inflation persistently staying above the central bank’s comfort zone.
"As of now, we see a higher base softening the May 2022 CPI inflation print considerably, though it will likely remain above 6 percent,” Nayar said.
While a back-to-back hike in the June 2022 policy was not yet certain, an additional 35-60 bps of rate hikes in the remainder of H1 FY2023 was possible, she said.
“If a de-escalation in geopolitical tensions cools commodity prices, then we expect a pause to reassess the impact on growth, followed by another 25-50 bps of rate hikes in CY2023,” Nayar said.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
