Brokers speak on the telephone during trading hours inside a dealing room at a bank in Mumbai, India (Photographer: Abhijit Bhatlekar/Bloomberg News)  

Indian Bond Yields Rise For Fourth Consecutive Week

Yields on Indian government bonds rose for the fourth consecutive week as the central bank continued to suck out liquidity and also signaled that its focus remains on inflation despite a near term hit to the economy due to demonetisation.

The benchmark 10-year bond yield closed the Friday trading session at 6.54 percent compared to the previous close of 6.52 percent. Yields touched a low of 6.46 percent and a high of 6.55 percent during the week.

The Reserve Bank of India continues to suck out liquidity through various tools including reverse repo auctions and issue of market stabilisation scheme (MSS) bonds. The government’s November 8 decision to withdraw Rs 500 and Rs 1000 notes from circulation had led to a surge in banking sector liquidity, which, in turn, pushed bond yields down as banks increased purchases of government bonds.

After hitting a low of 6.18 percent post demonetisation, yields normalised as liquidity was sucked out and after the central bank kept rates unchanged at its December 7 monetary policy review.

Minutes of the review meeting, released on Wednesday, showed that the RBI governor is looking to bring inflation down to 4 percent - the mid-point of the flexible inflation target. This pushed up yields further.

The impact of the withdrawal of SBNs (specified bank notes) on growth and inflation, while uncertain, is transitory. Against this backdrop, it is important for monetary policy to stay focused on the medium-term and strive to achieve, on a durable basis, the middle of the notified inflation target range i.e., 4 per cent. Achieving the inflation target of 5 per cent 10 for Q4 of 2016-17 and securing 4 per cent – the central point of the notified target range – remains the primary objective. 
Urjit Patel, Governor, Reserve Bank of India (Minutes of MPC meet on December 7)

After from domestic factors, yields have also adjusted to the increase in global bond yields. US bond yields rose for six consecutive weeks before correcting marginally this week. The 10-year US Treasury yield fell to 2.54 percent on Thursday as compared to 2.59 percent last Friday.

The narrowing spread between US and Indian bond yields has led to substantial selling by foreign investors in the domestic market. Global investors have sold Rs 44,685 crore of debt this year, even as they purchased equities worth Rs 25,573 crore.

Indian Bond Yields Rise For Fourth Consecutive Week