India Bond Yields Higher Amid Bets Of Frontloaded Rate Hikes

Thursday,   19-May-2022   01:11 PM (IST)

Indian federal government bond yields were trading higher, as the minutes of the latest monetary policy meeting raised bets of frontloading of rate hikes, while the benchmark yield was steady tracking a fall in U.S. Treasury yields. The benchmark 6.54% bond maturing in 2032 was at 94.47 rupees, yielding 7.35%, as of 1:00 p.m. in Mumbai against 94.42 rupees, yielding 7.36%, yesterday. Other bond yields were up by two basis points. The Indian rupee was at 77.69 to the dollar from 77.58 in the previous session. The 10-year U.S. Treasury yield eased to near 2.90% overnight, as investors preferred safe-haven instruments following a rout in equities amid concerns about the impact of higher consumer prices on global economic growth. Benchmark Brent crude also eased to near $110 per barrel, from near $115 levels, as data showed a fall in crude inventories. The contract was trading 1.15% higher at $110.36 per barrel. India imports nearly 85% of its crude oil needs and higher oil prices pose inflationary pressures in the country. India’s central bank will remain resolute and committed to bringing back inflation closer to the target through all possible instruments at its disposal, Reserve Bank of India Governor Shaktikanta Das said. “The worsening outlook of inflation warrants timely action to forestall second round effects which could lead to unanchoring of inflation expectations. Heightened uncertainty and volatile financial markets could also add to such unhinging of expectations,” Das, who also heads the nation’s rate-setting Monetary Policy Committee, said in the minutes released post market hours yesterday. Meanwhile, other members said the MPC will have to frontload rate hikes to respond to elevated prices brought on by shortages and supply bottlenecks. “In the absence of supply augmenting measures and/or easing of supply bottlenecks, they (MPC) will do what they can do -- frontload their actions, compress demand and render the recovery stillborn,” Reserve Bank of India Deputy Governor and MPC Member Michael Patra said. External member Jayanth Varma said it is now imperative to frontload the rate action to the extent possible and he feels that more than 100 basis points of rate increases needs to be carried out very soon. His preference was for a 50-basis-points hike in repo rate in May. Earlier this month, the MPC raised the key policy rate by 40 basis points in an unscheduled meeting, its first such move in nearly four years as the monetary authority reverses pandemic-era easing to rein in runaway inflation in Asia’s third-largest economy amid headwinds arising from a prolonged conflict in Ukraine. India's retail inflation stood at an eight-year high of 7.79% in April, with the print hovering above the central bank’s 6% tolerance ceiling for a fourth straight month.