RBI bond auction: Intention is to partly reverse sell-off seen in bond yields, says I-Sec PD

“The success of RBI pushing yields lower depends on various factors. Firstly, how strongly they are committed to loading yields, with what frequency they wish to intervene. Second, the big constraint here would be the potential cause to at the short end of the yield curve; if there are signs that the short end bond yields increase, RBI will have to be wary. It would be an absolute travesty in our view because most of the bank loans or floating rate loans are linked to the short end of the yield curve,” he said, adding that so, if short-end yields were to rise now, that cost will have to carefully considered by RBI. Third is the fiscal risk and lastly, how well coordinated these interventions are from RBI and government will be another factor, he added.

According to him, short positions in 10-year bond will be seen due to liquidity premium.

Talking about range, he said, “We were earlier expecting yields to lift to 7 percent in the run-up to the budget. Now with RBI clearly giving the yield signal, which it had not given in the past, the yields could settle between 6.50 percent and 6.75 percent range.”

Speaking about inflation, Upadhyay said, “The monetary policy minutes were in-line with the hawkish message we got from the policy statement. Most Monetary Policy Committee (MPC) members feel that inflation pickup is broad-based and not just linked vegetables like onions. Even the most dovish member looks wary about inflation slowing all the way to 3.8 percent between July and September, as is the official RBI forecast.”

“My sense is that RBI and the other MPC members would at least want to look at the January-March inflation numbers before they evaluate prospect of any further accommodation. The bar for any further easing is high and can also be inferred from RBI doing ‘operation twist’ kind of a statement which typically is done after the conventional monetary policy firepower is extinguished. So bar for further easing is high but we have still retained 15-25 bps of rate cut, most likely it will be in the next fiscal,” added Upadhyay.