Kolkata: Indian bond yields hardened ahead of the Reserve ‘s (RBI’s) monetary policy review, tracking the US treasury yield and reflecting the rupee’s depreciation, although market experts expect both a dovish central bank commentary and a lower dose of incremental increase in rates.
Odds are shortening on an increase of 35 basis points in rates. One basis point is 0.01%. RBI had hiked repo rate by 50 basis points thrice after the 40 bps initial hike to start the tightening cycle in April.
The benchmark 10-year government’s dated stock – 7.26% 2032 – closed Tuesday at 7.25%, up from 7.19% seen a few days back. The yield was 7.23% at Monday’s close of the trade. The latest yield is, however, 25 basis points lower than what it was a month ago, as inflation pressure eased prompting the US Fed to indicate a slower rate-hike pace.
Traders said the bond market has already discounted a lower rate rise and softer tone from India’s monetary policy maker. Bond prices and yields move in opposite directions.
“With a fall in commodity prices and some early signs of inflation coming down, the RBI may choose to slow down the pace of rate hikes,” said Pankaj Pathak, fund manager (fixed income) with Quantum Mutual Fund.
The October prints of retail and wholesale inflation were at 6.8% and 8.4%, respectively. India Ratings & Research expects the retail inflation to soften to around 6.6% in November and ease further thereafter provided the geo-political situation does not worsen anymore.
“While a rate hike of 35 bps is broadly discounted in the yields, the markets expect a slightly dovish tone from the MPC,” said Anand Nevatia, fund manager with Trust Mutual Fund.
The repo rate currently stands at 5.90%, 190 basis points more than what it was in March before the beginning of the tightening cycle.
“Monetary policy often works with a long lag. The impact of past rate hikes and liquidity tightening measures is yet to be seen. Thus, there is a risk of over-tightening the monetary policy and hurting growth recovery at a nascent stage,” Pathak said.
The GDP grew 6.3% year-on-year during July-September, indicating that despite the geopolitical uncertainty and fear of a global growth slowdown, the Indian economy has shown resilience.
The World Bank on Tuesday revised its FY23 GDP growth forecast for India upwards to 6.9% from its earlier projection of 6.5% made in October, as India’s economy has shown strength against global shocks.
India Ratings however believes that the recovery underway in the industrial sector is nascent. The industrial output growth rebounded to 3.1% year-on-year in September after contracting 0.7% year-on-year in August. “A closer look at the factory output data suggests that eight sectors representing roughly 25% of the manufacturing sector witnessed a contraction in 2QFY23. This kept the year-on-year growth in the manufacturing sector at a tepid 1.4% in 2QFY23,” the rating firm said.
These sectors were labour-intensive sectors such as apparel, textiles, leather and related products as well as pharmaceuticals, medicinal & related products and electrical equipment.
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