Benchmark 10-year bond yields spike to 3-month high on elevated retail inflation
The benchmark 10-year bond yields rose to a three-month high on February 14 after the retail inflation soared above the Reserve Bank of India’s (RBI) upper tolerance limit, stoking the chances of more interest rate hikes. The 10-year bond yield traded higher around 7.397% on February 14, a level last seen on November 1, 2022.
The consumer price index (CPI) in January surged to a three-month high of 6.52% partly fuelled by a sharp rise in food prices and higher core inflation. The retail inflation in the month of December 2022 was 5.72%.
The CPI has pipped above RBI’s upper tolerance limit of 6% after a period of two months. However, it has remained above the medium-term target of 4% for 40 months in a row. With a higher CPI imprint, it is now expected that the RBI would remain vigilant of the macro data and the global developments in its April policy.
However, bond markets have reacted negatively to the higher than expected CPI data. The bond prices move in the opposite direction of the bond yields.
The RBI, in its monetary policy review in February, had increased the repo rates by 25 basis points to 6.5%. The central bank kept its stance unchanged at “withdrawal of accommodation”. However, the tone of the policy was hawkish as the rate-setting panel highlighted the elevated nature of core inflation and expected that domestic inflation would rise going forward given the continued global risks.
The RBI’s Monetary Policy Committee (MPC) also mentioned that they were still far away from achieving their objective of durable disinflation. It projected retail inflation for FY23 at 6.5% and for Q4FY23 at 5.7%. RBI forecasts FY24 retail inflation at 5.3% with Q1 at 5%, Q2 at 5.4%, Q3 at 5.4% and Q4 at 5.6%.
The central bank’s concerns over higher inflation and keeping doors open for a further rate hike led to a spike in bond yields. Additionally, the markets now anticipating that the latest CPI data can even prompt RBI to go for a further rate hike in April.
Rising bond yields rise usually indicate that interest rates are increasing, leading to higher borrowing costs for companies. Higher interest rates impact corporate profits negatively, which can result in lower stock prices. A spike in bond yields also makes bonds more attractive to investors and they are likely to move away from risk assets like equities.
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The retail inflation for the month of January was 6.52%, breaching the upper tolerance limit of 6% set by the Reserve Bank of India (RBI).