NEW DELHI – The government bond market witnessed a sharp selloff on Wednesday ahead of a statement by Reserve Bank of India Governor Shaktikanta Das at 2 pm.
The yield on the 10-year benchmark government bond shot up as much as nine basis points to 7.22 per cent as traders feared the central bank governor would announce a rate action. Bond prices and yields move inversely.
“The unexpected announcement has caught markets by surprise and the knee-jerk reaction is to fear a rate action,” a senior treasury official at a large foreign bank said on condition of anonymity.
“Traders are speculating if the MPC (Monetary Policy Committee) has met over the last few days. However, there is a lot of confusion. There has been no fresh negative development to prompt an off-policy rate hike. Moreover, in the recent past, rate actions have been announced at 10 am when the markets opened.”
The market’s trepidation is understandable as the RBI is widely expected to start raising interest rates soon given Consumer Price Index inflation is above the central bank’s comfort band of 2-6 per cent.
The latest reading, released on April 12, showed headline retail inflation had surged to a 17-month high of 6.95 per cent in March.
With global crude oil prices skyrocketing following Russia’s invasion of Ukraine in late February, upside risks to India’s inflation have significantly increased, given that the country heavily imports the fuel.
In its policy statement in April, the RBI sharply increased the inflation forecast for the current financial year to 5.7 per cent from 4.5 per cent earlier.
It also said that it was focused on the withdrawal of accommodation and would prioritise inflation over growth after a gap of three years.
The RBI also narrowed the interest rate corridor by introducing the Standing Deposit Facility as the new floor of the corridor.
The SDF rate was set at 3.75 per cent as against 3.35 per cent for the reverse repo rate – the earlier floor of the interest rate corridor.
Moreover, global financial conditions have also tightened over the last few months as the US Federal Reserve has signalled an aggressive plan to raise interest rates in order to rein in runaway inflation in the world’s largest economy.
Over the last few months, several analysts have said that the RBI may be behind the curve when it comes to normalising ultra-loose policies adopted to support growth during the pandemic.