Rates surged after RBI revised inflation forecast

Both the short-term and long term rates have shot up raising overall funding costs.

The benchmark bond yield Friday rose by 16 basis points to 7.07 percent, the highest level since June 10, 2019, show data from Bloomberg. When bond yields rise prices fall.

The spike in yields was sharper in shorter duration papers with the five-year sovereign debt securities yielding 20 basis points higher at 6.60%.

A basis point is 0.01%.

“This policy gave the much-desired clarity to the markets, which have clearly factored in a 40 bps rate hike,” said A Balasubramaniam, CEO at Aditya Birla Mutual Fund. “While rates are now going up across the board, this will not weigh on sovereign borrowings.”

North Block will borrow Rs 8.45 lakh crore in the first half, or 60% of the total market borrowing planned for the financial year.

The weighted average overnight call rate (WAR) surged as much as 33 basis points to 3.59 percent. Banks lend and borrow each other using interbank call money rate.

“In absence of adequate credit demand, sovereign papers will find enough investor demand,” said Balasubramaniam.

RBI governor Shaktikanta Das said that the central bank prioritised inflation over growth, a phenomenon that was warranted in the wake of Russia-Ukraine war, which sent global crude oil prices soaring. India, being of the largest oil importers suffers from higher prices whenever global crude prices surge.

While the Monetary Policy Committee did not change the policy and the accommodative stance, it raised the inflation forecast by 120 basis points for the fiscal year to 5.7 percent, from 4.5 percent citing rising commodity prices. This is largely deemed to be a rate hike and a stance change, dealers said.

“Debt markets are adjusting to the RBI’s inflation projections amid geopolitical uncertainties,” said Naveen Singh, head of trading at ICICI Securities PD. “It is now clear that we are heading to a hard interest rate regime with the central bank clearly spelling out its intent.”

“Also, the narrowing of the corridor impacted all shorter duration bond yields and money market rates,” he said.

Overnight Indexed Swap (OIS), a derivative interest gauge, spiked 21 basis points to 4.01 percent for its three-month contract, the highest level since April 21, 2020, show Bloomberg data. The one-month gauge was up 16 basis points.

It narrowed the corridor of the Liquidity Adjustment Facility fixing the Standing Deposit Facility (SDF) rate at 3.75 percent. The Marginal Standing Facility, by contrast, is at 4.25 percent, helping narrow the corridor to 50 basis points.

Economic growth forecast has been cut to 7.2 percent, from 7.8 percent, as supply disruptions lessen output and high prices destroy demand.

Sovereign Papers:

Benchmark 10-yr yield 7.07%, up 16bps

5-yr at 6.60%, up 20 bps

2-yr at 5.16%, up 11 bps

14-yr at 7.34%, up 14

Derivatives:

OIS 3-month at 4.01%, up 21 bps

OIS 1-month at 3.83%, up 16 bps

Call Money:

WAR at 3.59% Fri vs 3.26% Thurs

Source: Bloomberg/CCIL