10-year bond yield hits 7.25% as 7.44% inflation blocks way to cut policy rates

The India 10-Year Bonds did not trade on August 15 and 16.

India’s 10-year sovereign bond yields jumped in early trade on August 17 after a sharp spike in retail inflation raised the chances that policymakers may find it difficult to cut interest rates anytime soon.

The bond yields hit 7.25 percent, rising 0.58 percent, as traders sold off sovereign bonds – the highest levels since April 6.

The 10-year benchmark 7.26 percent 2033 bond yield was trading at 7.2480 percent at 12:40 pm, as against 7.2034 percent closed on August 14.

The India 10-Year Bonds did not trade on August 15 and 16 as Indian money markets were closed on these days due to Independence day and Parsi New Year, respectively.

Bond yields and bond prices are inversely proportional and, hence, if yields go higher, price of bonds go down.

"Bond yields have inched up today mirroring the uptrend in US yields that have moved up by 10 bps mainly due to hawkish commentary in minutes for last fed policy that got released yesterday," said Ajay Manglunia, managing director and head of investment group at JM Financial.

Manglunia further added unexpectedly higher inflation here was a dampener with rising crude prices, keeping traders jittery and refraining from taking fresh positions. "We may have elevated levels in light of these reasons for sometime here."

India's headline retail inflation rate crashed past the upper bound of the Reserve Bank of India's (RBI) 2-6 percent tolerance range in July and shot up to a 15-month high of 7.44 percent, spurred by a massive increase in vegetable prices, data released by the Ministry of Statistics and Programme Implementation showed on August 14.

At 7.44 percent, the Consumer Price Index (CPI) inflation print for July is a huge 257 basis points higher than the revised June number of 4.87 percent and is the 46th month in a row that it has come in above the RBI's medium-term target of 4 percent.

Before this sharp jump, the RBI had been making steady progress in taming inflation. However, markets, as well as the RBI, were prepared for a rebound in inflation in July, with the central bank on August 10 raising its CPI inflation forecast for July-September by 100 basis points to 6.2 percent even as its Monetary Policy Committee (MPC) left the repo rate unchanged at 6.5 percent for the third meeting in a row.

“We expect the headline inflation to remain elevated for a few more months and ease in H2FY23 assuming normalisation of food prices. Elevated Brent crude oil prices are an added concern,” said Anjali Verma, Research Analyst at Pillip Capital.

“Until we see the ongoing inflation getting entrenched, we retain our expectation of a prolonged pause by the RBI. Dip in core CPI to 5 percent is a positive. Bond yields should remain elevated, marginal upside likely in the near-term.”