Bond yields moving up after RBI’s status quo

Dealers indicated that the only major trigger for the bond market in the coming times are the fiscal numbers.

Bond market continued to see correction on Friday with the 10-year yield closing 6 bps higher at a two-month high of 6.66% even as fresh supply hit the market in the form of weekly auctions.

On Thursday, the Reserve Bank of India (RBI) had decided not to cut the repo rate further after having reduced it by 135 basis points this year. The central bank had also revised its consumer price index (CPI) inflation upwards to 5.1-4.7% for the second half of fiscal year 2020. Market participants indicated the central bank’s decision came as a total surprise as dealers had expected at least a 25 basis points cut in the repo rate.

Siddharth Shah, head of Treasury at STCI Primary Dealer, said the market on Thursday was loaded with long positions as it was expecting a 25 bps point cut.

“However, the sentiment soon turned negative post the status quo announcement. At least till the end of this fiscal, the inflation is expected to remain high leading to market pricing in a low possibility of a rate cut. On Friday there is additional supply in terms of auction and that is taking a toll on the market that has already shed positions on Thursday. We do not really expect that benchmark yield to shoot beyond the 6.75% level unless some real negative news on the fiscal deficit hits the market,” he said.

Dealers indicated that the only major trigger for the bond market in the coming times are the fiscal numbers. “Any bad news on that front will be an overhang on the yields,” a dealer said.

Meanwhile, foreign portfolio investors (FPIs) investments remained tepid over the last few weeks. Foreign investors remained net sellers of Indian bonds for the month of November having sold $442.06 million on a net basis according to Bloomberg data. In December so far, FPIs have poured in only $172.27 million on a net basis.