Bond yields soften as RBI move eases debt supply concerns

economictimes.indiatimes.com:

yields eased after the Reserve Bank of India's policy statement Thursday as traders were relieved that the central bank's choice of instrument to reduce surplus liquidity with banks did not translate into more debt supply. The RBI's characterisation of a recent jump in food prices as transient also provided comfort to the bond market by setting a high bar for future rate hikes, treasury executives said. The yield on the 10-year benchmark closed at 7.15%, 2 basis points lower than previous close.

Bond prices and yields move inversely. One basis point is 0.01 percentage point. «Recent uptick in food inflation is expected to be short-lived and is looked through as of now with monsoon picking up well,» Vikas Garg, head, fixed-income, Invesco Mutual Fund said, adding that there was remote likelihood of more rate hikes.

On Thursday, the RBI left the repo rate unchanged at 6.50% and retained its stance of withdrawal of accommodation. While the status quo on rates was expected, the RBI's decision to announce an incremental cash reserve ratio (CRR) requirement for banks was not. The move on the CRR was aimed at whittling down the large surplus of liquidity prevailing in the banking system and thereby tackling inflation risks.

While an increased CRR is a negative for banks as funds impounded under that route earn no interest, bond traders took heart from the fact that the RBI did not announce measures such as open market bond sales or the sale of securities under the Market Stabilisation Scheme (MSS). Open market bond sales or the use of the MSS would entail the RBI selling government securities to mop up excess liquidity. Given that gross government bond supply is at a record high Rs 15.4 trillion in FY24, the market would find