Bond yields could rise to 7.5% on crude, inflation pressures
Reserve Bank of India‘s (RBI) open market operation (OMO) sales could add to the pressure by increasing government bond supply as the central bank drains surplus liquidity. The benchmark 10-year yield closed at 7.05% on Wednesday, from its previous close of 7.07%.
ET Bureau“Imported inflation, possible exchange-rate pressure, changes in the expected RBI response, and the compensation investors require for uncertainty signal that 10 year yields can now inch toward 7.25%, and then attempt somewhere around 7.50%, if the supply side shocks and energy security worsens,” Soumya Kanti Ghosh, chief economic adviser, State Bank of India said in a recent report.
Domestic bond yields may rise as much as forty-five basis points. Elevated crude prices and rising inflation expectations weigh on sentiment. The Reserve Bank of India’s open market operation sales will increase bond supply. This action drains surplus liquidity from the financial system. Bond traders anticipate yields could reach around seven point five zero percent.
“Bouts of domestic liquidity can support the front end yields to some extent, though it does not necessarily eliminate long-end pressure as an oil shock can work through several channels simultaneously,” Ghosh said.
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Yields had climbed to around 7.15% in April, Bloomberg data showed.
The RBI will conduct an OMO sale of ₹1 lakh crore in three tranches in September. The central bank also conducted two overnight variable rate reverse repo (VRRR) operations on Wednesday, cumulatively draining ₹2.90 lakh crore from the system liquidity. The RBI will conduct another overnight VRRR on Thursday for ₹3 lakh crore.Read more: Rupee languishes at six-week low ahead of Fed outcome, RBI limits losses
“Sentiment on yields is weighed down by OMO sales and expectations of a rate hike at the upcoming MPC meeting, putting the 10-year government bond yield on course to test 7.25%. Upward pressure on yields is also being reinforced by higher crude oil prices, rising inflation expectations and elevated global rates,” said Sameer Karyatt, MD and head of trading, DBS Bank India.
Brent crude oil futures were trading around $107 per barrel on Wednesday.
