Bonds crack as inflation spike leads to speculation of June rate hike by RBI

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NEW DELHI: Government bond prices fell as sharply higher-than-expected headline inflation for March bolstered the case for the Reserve Bank of India to start raising benchmark policy rates as soon as possible. June, dealers said.

The yield on the benchmark 10-year 6.54% 2032 paper jumped 9 basis points to 7.28%. Bond prices fall when yields rise.

Data released after hours on Tuesday showed India’s consumer price index-based inflation hit a 17-month high of 6.95% in March, from 6.07% a year ago. a month.

The March inflation print is well above the upper limit of the RBI’s comfort zone of 2-6% for the price indicator. The central bank aims to keep CPI inflation at 4% over the medium term.

Market participants were expecting inflation of around 6.40%. The sharp rise in inflation in March was largely due to tighter food prices.

As India faces strong inflationary pressures from soaring global commodity prices following Russia’s invasion of Ukraine in February, pressure is mounting on the RBI to act quickly to anchor consumer prices.

As the RBI set the stage for the withdrawal of accommodation in its policy statement last week and effectively increased the operational cost of funds by narrowing the interest rate corridor, bond traders expect now waiting for the central bank to raise the repo rate in June.

“With the inflation headline significantly up and momentum still rising, we are raising our projected terminal repo rate to 6% by Q3 2023 with a rate hike of 25 basis points each. of the next eight MPC meetings,” the Nomura economists wrote.

“We see a high risk that rate hikes will be even more anticipated, with a 50 basis point hike at one of the meetings in 2022, given that monetary policy often operates with long lags.”

The likely rise in benchmark interest rates and sovereign bond yields is expected to increase borrowing costs across the economy. Government bond yields are the benchmarks for pricing a wide variety of credit products.

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