MUMBAI: The yield on the 10-year benchmark Indian government bond could revisit its recent high of over 7.60% in the medium term as the central bank raises interest rates and the government borrows more, analysts said.
“The 10-year bond yield may test 7.60% levels in coming months, as we expect the central bank to hike policy rate by 60 basis points by December, and fears of additional supply will also start to impact,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
The 10-year benchmark bond yield ended at 7.35% on Monday, having risen by 19 basis points in the two trading sessions since the Reserve Bank of India raised its key lending rate, or repo rate, by 50 basis points to 5.40% on Friday.
The yield, which was at 7.11% just before the policy move, had hit an over three-year high of 7.62% in June.
Indian markets are shut on Tuesday for a local holiday.
The latest rate hike was the RBI’s third in the current cycle to rein in inflation that has stayed above its tolerance band for six straight months.
RBI governor Shaktikanta Das also highlighted concerns over elevated inflation and maintained its inflation forecast at 6.7% for the current financial year.
India’s retail inflation data for July is due on Aug. 12 and even though market participants expect inflation to ease, the reading is expected to stay above the upper tolerance level of the RBI for next few months. The RBI targets inflation at 4.00% with a tolerance band of 200 basis points on either side.
“With focus on inflation, it is clear that more rate hikes are on the cards, and any positive move would come in only from global factors like US treasury yield or oil prices,” said Vijay Sharma, senior executive vice president at PNB Gilts.
India aims to gross borrow a record $179.74 billion through sale of bonds in the current financial year to meet fiscal deficit target of 6.4%.
“We continue to believe that centre may have to resort to extra borrowing even if budgeted fiscal deficit is met. On top of all this, we consider the 10-year segment mispriced as it trades purely as a sentiment product,” ICICI’s Upadhyay added.