Short-term rates at three-year high

Ahead of the Monetary Policy Committee (MPC) meeting next week, short-term yields are rising. The yield on the Reserve Bank of India’s one-year T-bill touched 6.08% on Wednesday (reserve Bank of India) auction. This is the highest level since July 2019 and a nearly three-year high.

Yields had risen on the short end of the curve after the introduction of the permanent deposit facility (SDF) by the RBI as the effective floor of the LAF corridor in April. At 3.75%, the SDF was 40 bps higher than the reverse repo rate of 3.35%, in a move considered to be an increase in the stealth rate.

Meanwhile, as the bond market prepares itself for another 40 bps hike in the repo rate, yields on the benchmark rose by 2 bps to 7.433 on Thursday. The recent high on May 9 was 7.47% after MPC opted to hike the repo by 40 bps on May 2. The five-year paper also lost some value as the yield rose 2 bps to 7.23%.

It has become clear since early May that the MPC will choose to go ahead with the rate hike rather than speed it up. The first milestone is 5.15% which was repo in February 2020 before the pandemic. The general consensus believes that there will be a 40 bps hike in June followed by a 35 bps hike in August. Thereafter, the pace of growth will depend on inflation forecasts; While some economists are looking at the terminal repo of 5.5-5.75%, there are others who believe that it may cross 6%.

“Given the government’s massive lending programme, it is unlikely that the central bank will consider a terminal repo rate of more than 5.5%,” said the large bank’s treasurer.

RBI Governor Shaktikanta Das confirmed in a recent interview that there will be a further hike in rates in the next few meetings; It was a ‘no brainer’, he said. However, dealers say the central bank’s statement will be unnecessarily brash, as it is unlikely to sour sentiment.

Reviewing monetary policy in April, the central bank said it was prioritizing inflation concerns over growth and raised the inflation forecast by 120 bps to 5.7%. However, this is likely to go further and the revised forecasts for the current financial year will be closely monitored. A faster-than-expected increase in forecasts will accelerate yields. Markets are not expecting any OMOs (Open Market Operations) immediately. He believes that the central bank may not want to appear overly concerned. Further, he points out that the RBI would like to wait for a few months to take stock of geopolitical developments and global crude oil prices.

Meanwhile, companies are borrowing heavily in the corporate bond market to lock in lower interest rates. Bloomberg reported that about Rs 8,330 crore has been withdrawn in the last three days and Rs 8,590 crore is likely to be raised before the end of the week.