RBI Monetary Policy: Govt Bond Yields Rise As Central Bank Continues Its Fight Against Inflation

In India, the yield of 10-year government securities is considered the benchmark and shows the overall interest rate scenario

The RBI announced a 35 basis point hike in the repo rate to 6.25 per cent, continuing its fight against inflation.

After the Reserve Bank of India’s announcement of the interest rate hike, the government’s 10-year bond yields jumped more the 6 basis points on Wednesday. 

The 10-year bond yields traded at 7.301 per cent from its previous close of 7.247 per cent. The 5-year bond yield gained 8 basis points to 7.187 per cent. The one-year bond yields remained flat at 6.85 per cent. This is the fourth straight session when both the 10- and 5-year bond yields traded in the green. On Wednesday rupee strengthened 0.2 per cent to 82.28 against the dollar.

In India, the yield of 10-year government securities is considered the benchmark and shows the overall interest rate scenario. As government borrowing goes up, the supply of bonds in the market goes up, putting pressure on prices. 

RBI Governor Shaktikanta Das said in his speech on Wednesday said, "We will keep Arjuna's eye on inflation and we will be ready to act. Our actions will be nimble."

The RBI announced a 35 basis point hike in the repo rate to 6.25 per cent, continuing its fight against inflation. The central bank also estimated the inflation to remain at 6.7 per cent during FY23 with Q3 at 6.6 per cent and Q4 at 5.9 per cent. 

In October, India's retail inflation rate fell to a three-month low of 6.77 per cent from 7.41 per cent in the previous months. But it stayed above the central bank's upper tolerance band of 6 per cent.

The governor said, “Going forward, food inflation is likely to moderate with the usual winter softening and the likelihood of a bountiful rabi harvest, but pressure points remain in the form of prices of cereals, milk and spices in the near-term. The main risk is that core inflation (CPI excluding food and fuel) remains sticky and elevated. Overall, the CPI price momentum remains high. Risks from adverse weather events add to uncertainty in the outlook.”

“Global commodity prices, including crude oil, have undergone some downward correction, but uncertainty continues to surround the near-term outlook in view of the prolonging geo-political hostilities. The outlook for the US dollar and hence imported inflation also remains uncertain,” he added.