View: There's more to the rise in bond yields than the hawkish MPC minutes

Indian bond yields continue to inch higher but more because of the recent spree of rate hikes by the central banks of UK, Norway, Switzerland and Turkey. US Fed Chair Jerome Powell’s testimony to Congress backing more rate hikes albeit at a careful pace has added to the global and local mood of bearishness on bonds. Dealers noted the hawkishness in the minutes of the monetary policy committee but said that they wouldn’t trade on it. They would rather wait for data and rate action.

The minutes of the policy were probably a tad more hawkish than the press conference post the June 8 policy. In that presser, the governor asserted the MPC’s job on inflation is unfinished until the inflation rate gets aligned to the target of 4 percent.

In the minutes, he pretty much reiterated these thoughts that “the fight against inflation is not yet over”; that there is a “need to assess evolving inflation-growth outlook and stand ready to act” and that given the uncertainties, it is tough to give definitive forward guidance about future action in a rate tightening cycle (emphasis ours). “We have a way to go to align headline inflation with 4.0 per cent target on a durable basis,” he concluded.

RBI-MPC member Michael Patra is even more hawkish when he writes that “holding the rate unchanged should not be interpreted as the interest rate cycle having peaked” and the “pause is for careful evaluation on the extent of additional policy tightening, if needed”. Pause is till the next meeting of the MPC, and not a prolonged pause, he warns. RBI member Ranjan is more satisfied with growth and inflation but worries that any softening of stance can impede the pass through of rate hikes announced so far.

What is the difference in the latest minutes is that external member JR Varma, who had earlier voted against repo rate hikes above 6 percent, admits “it would be premature to declare victory at this point of time based on the inflation prints of a couple of months”. There seems near broad agreement to use the clement macro situation to push towards the inflation target of 4 percent. Only member Ashima Goyal worries that MPC ought not to let real repo rate rise too high. “This is what happened in 2015 as international oil prices fell, damaging the economic cycle,” she writes. She clearly does not want “the nominal repo to be kept higher for longer”.

Net net the market has judged the minutes to be a tad more hawkish because of a more general commitment to bringing inflation to 4 percent. And Patra goes on to emphasise that the pause should not be seen as an end to the hiking cycle. But dealers iterated that minutes are a lot of noise and the rise in bond yields in morning trades was more due to the global rate hikes and yield spurts.

In the past 24 hours, three major central banks – BOE, Swiss National Bank and Norges Bank – have raised rates, and the BOE by more than expected. What’s more a long time outlier, Turkey, raised rates by 650 bps to 15 percent, acknowledging the conventional goal of fighting inflation through higher rates.

While a large part of Indian markets don’t see the need for RBI to follow Western central banks, there is a slight concern on interest rate differentials between dollar and rupee rates. The swap market is pencilling a minor chance of India’s first rate cut in April, but bigger bets are on rate cuts in June and October of 2024. No hikes are pencilled in by the Indian bond markets.