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Government bond yields surged on Thursday as hawkish signals from the Reserve Bank of India’s Monetary Policy Committee (MPC) meeting minutes released Wednesday evening, coupled with a sharp intraday rise in crude oil prices, triggered a broad sell-off, said dealers.
The yield on the benchmark 10-year government bond settled at 6.87 per cent, against the previous close of 6.82 per cent. The yield on the 5-year government bond rose by 7 basis points to settle at 6.52 per cent.
Market participants said the market is now increasingly pricing in the possibility of a rate hike as early as the next policy review, scheduled in early October. The MPC’s deliberations, they noted, were held when crude was trading near $80 a barrel, a level at which the committee’s tone was seen as dovish. With crude now closer to $94 a barrel, participants believe the case for tightening has strengthened further.
“Minutes of MPC meeting should be perceived as hawkish as against the policy statement which was seen as dovish. The big change in the two is the emphasis on risks to inflation becoming broad-based in coming months given buoyant demand,” economists at ICICI Bank said in a note.
Market focus will now shift to the upcoming August and September CPI inflation prints, which are expected to guide near-term rate expectations. A further uptick in inflation would add to the case for a hike, said dealers.
“There was an element of surprise around the tone of the minutes. During the post-policy interaction, MPC commentary had appeared relatively dovish, even as market was expecting a more hawkish stance. The minutes revealed a considerably more hawkish tone than what had come through at the press conference. This led to unwinding and repositioning,” said a dealer at a primary dealership.
Market participants said that the overnight indexed swap (OIS) curve is currently pricing in at least a 20 basis point rate hike at the next policy meeting, with the curve indicating a cumulative 25 basis points of tightening over the next three months. This positioning aligns with the broader hawkish shift seen in bond markets following the MPC minutes, alongside continued pressure from elevated crude prices and firm global yields.
The one-year OIS rate, the most closely watched gauge of near-term interest rate expectations, rose by 13 basis points to settle at 5.94 per cent on Thursday.
Further, US Treasury yields have remained elevated even after the Federal Reserve’s bond-buying announcement, with the relief proving short-lived.
“Despite of bond buying announcement by the Fed, still the US yield is inching up. On Wednesday there was a 5 basis point relief, and again during the day today it went back again,” said the treasury head at a private bank.
Despite recent capital inflows, the rupee has seen little relief, continuing to remain under pressure tracking global cues. While inflows tied to the FCNR (B) scheme have offered some support, they have not been sufficient to drive meaningful appreciation.
The local currency settled at 95.71 per dollar, against the previous close of 95.76 per dollar.
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