A change in the benchmark yield prompts bankers to alter their lending and deposits rates accordingly. The spike in the yield came even as the RBI’s committee that sets the interest rate started its three-day meeting with the outcome expected on Wednesday morning.
Last month, RBI governor Shaktikanta Das had said that expectations of a rate hike in the June policy meeting were a‘no brainer’. Bankers expect arate hike of up to 50 basis points (100bps = 1 percentage point) after 40bps in early May.
However, bond market players feel rates to go up even more sharply over the next few months, mainly to tame rising inflation. Prices could rise even further in the coming months on account of galloping crude oil rates. On Monday, Brent crude was hovering t the $120-per-barrel mark, near its 14-year high.
Bond market players said that a rising crude globally could result in higher prices for petrol, diesel and cooking gas in India. Since the government had recently cut duties sharply on petro products, mainly to rein in inflation, it may not have much legroom for further reductions in case crude prices keep increasing. This in turn could push up inflation in India.
To arrest a faster rise in prices, the RBI could raise interest rates more quickly so that people have less money to spend. But rising interest rates would almost certainly lead to higher EMIs, they said. Of late, loans from a large number of banks, housing finance companies and NBFCs are benchmarked to the repo rate, which is set by the central bank. Once the RBI hikes repo rate (at which banks borrow funds from it), all the loans benchmarked to this rate will also rise.
A debt fund manager pointed out that on June 1, the cut-off yield in the 364-day treasury bill auction was 6. 08%, which was a huge surprise for market players. The last time such a high yield for T-bills was seen, the repo rate was at 5. 75%. In comparison, the current repo rate is 4. 40%. So, the bond market is expecting the RBI to raise rates by about 125bps in the next few months. “This is indicative of a higher-than-expected policy rate tightening by the RBI in the upcoming reviews,” the fund manager said.
Bond dealers further pointed out that the government bond yields in several developed markets are also rising at a fast clip, which is prompting foreign fund managers to take money out of India and invest in those markets. Additionally, selling of bonds in the local markets is resulting in hardening of yields here, they said. Bond yields and their prices have an inverse relationship.