With inflation continuing to accelerate, markets expect the Reserve Bank of India (RBI) to retain the current repo rate and maintain a hawkish stance on its monetary policy. A brief slowdown in price rise post-April raised hopes of a longer repo rate pause by RBI. But now, as inflation is raising its ugly head, speculation is rife that RBI may continue its tight rate policy.
India’s CPI inflation rose to 4.81 per cent in June 2023, higher than market estimates, while food inflation increased to 4.49 per cent. On the other hand, the US CPI index dropped more than expected as the country’s core inflation slowed down, causing a sharp fall in US Treasury yields.
These developments are expected to impact the Indian bond market as well.
Meanwhile, the indicative yields for next week’s RBI Treasury bill auctions are 6.71 per cent, 6.84 per cent, and 6.86 per cent for three-month, six-month, and 364-day tenures, respectively.
For state development loan auctions, nine states have announced their participation: Andhra Pradesh, Goa, Mizoram, Bihar, Kerala, Punjab, Maharashtra, Telangana, and Tamil Nadu.
Andhra Pradesh and Mizoram are offering the highest interest rates at 7.55 per cent and 7.54 per cent for their bonds maturing on July 19, 2038, respectively. All other states are offering an average interest rate of 7.3-7.4 per cent for various tenures.
Indian Bond Market Trends
Says Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP, “The 10-year government bond yields fell 7 basis points to 7.09 per cent on Friday after the US treasury yield movements. The Indian bond market reacted positively despite India’s higher-than-expected CPI inflation.”
However, this scenario may be temporary as Indian bond yields may go up again next week. “We expect the 10-year bond yield to trade between 7.05-7.15 per cent levels,” he says.
SDLs are expected to fetch Rs 12,430 crore in next week’s auction as against the indicative borrowing calendar of Rs. 16,830 crore.
In the corporate bond market this week, the Power Finance Corporation (PFC) raised Rs 6,000 crore from two bond tenors. SBI retained only Rs 3,101 crore of AT1 bond at 8.10 per cent as against the total issue size of Rs 10,000 crore.
Says Srinivasan, “SBI was very particular about the cut-off yield not crossing above 8.10 per cent irrespective of the amount to be mobilised. The issue mobilised less than Rs 6,000 crore,and the yield range went up to 8.42 per cent.”
In other developments, MTNL has reportedly obtained approval to issue GoI-guaranteed bonds worth Rs 6,661 crore on a private placement basis for FY2023-24. “Mahindra and Mahindra Financial Services also got a fresh NCD AAA rating from India Ratings for Rs 10,000 crore, and “we expect them to tap the bond market at an opportune time,” adds Srinivasan.
However, Rockfort predicts the overall issue amount through corporate bond issuances will likely drop drastically in July compared to the previous month.