The Reserve Bank of India (RBI) hikes repo rate by 25 basis points on Wednesday, 7 October, following rate hikes by some of the major global central banks, such as the US Federal Reserve, the Bank of Japan, and the European Central Bank.
While a 25 bps hike was largely discounted, what disappointed the market was the central bank’s hawkish tone and signals that rates could be raised further from here.
“The MPC unanimously voted to increase the policy repo rate by 25 basis points to 5.50%. The MPC also decided to change the stance to ‘calibrated tightening’. It underscored that given the current conditions, rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook,” said RBI Governor Sanjay Malhotra.
Stock market benchmarks- the Sensex and the Nifty 50 – ended 0.59% and 0.76% lower, respectively, while the benchmark 10-year bond yields rose to 7.24% from 7.20% in the previous session.
Why are bond yields rising?
A combination of domestic and global factors is pushing yields up. Global yields have risen sharply as the rate-hike cycle has started. Moreover, there are concerns over the rising fiscal deficit, which is also making investors sell bonds aggressively, driving yields up.
Bond prices and yields move in opposite directions.
US 10-year bond yields hit 5.349% on 5 October, their highest level since April 2002.
In India, more rate hikes are possible as inflation is expected to stay high amid elevated oil prices and a weak monsoon.
7.25% yield level to be a new reference point?
India’s 10-year bond yields are at a multi-year high level, closer to 7.25%.
For India 10-year yields, Ritesh Nambiar, Head of Fixed Income, Motilal Oswal Private Wealth, believes 7.25% could be more like a level where yields consolidate than a firm ceiling.
“Seasonal demand from insurers and pension funds, along with RBI liquidity support, should hold yields near it for some time. Weekly auctions of ₹33,000– ₹36,000 crore will test that level. Higher cut-offs, wider tails or devolvement on primary dealers would signal weak demand. Further OMO sales would add to supply and tighten liquidity. If both happen, yields are likely to break above 7.25% into a higher range,” said Nambiar.
Ajay Kumar Yadav, CFP, Group CEO and CIO, Wise Finserv, believes 7.25% is an important reference point, but not necessarily the destination. The direction from there will be decided by inflation, liquidity and global rates rather than by any single yield level.
“I think 7.25% can certainly emerge as an important near-term reference level because the market has already been gravitating towards it. But I would see it more as a psychological and valuation level than a hard ceiling. Market participants had already been discussing 7.25% as a possible level even before the latest move,” said Yadav.
What happens beyond that will depend less on the number itself and more on what happens to crude oil, inflation, RBI policy, domestic liquidity and US Treasury yields.
As Yadav said, around 7.25%, the risk-reward for long-term investors starts becoming more attractive compared with where yields were a few months ago.
“That should bring some natural demand into the market. But if crude stays above $100, global yields remain elevated, and the RBI continues tightening liquidity or raising rates, 7.25% may not necessarily prove to be the peak,” said Yadav.
Anand K Rathi, co-founder of MIRA Money, also believes that the 7.25% level could emerge as an important near-term reference point for the 10-year G-sec yield.
“While 7.25% is a meaningful reference point, reaching this level by itself may not necessarily trigger an immediate RBI liquidity response, particularly given the prevailing liquidity conditions. If crude prices remain elevated and inflationary pressures persist, the 10-year yield could potentially remain at around 7.25%, which would represent a roughly 2–2.5-year high,” said Rathi.
What should be your bond investment strategy now?
Experts say looking at short-duration bonds as further monetary tightening is on the cards.
“In view of the ‘calibrated tightening’ stance, long-duration bonds face price erosion and, therefore, should be avoided now. The ideal choice should be the short-term bonds now. Focus on bonds having short to medium term maturities. Floating rate bonds are good in the evolving context,” said V K Vijayakumar, Chief Investment Strategist, Geojit Investments.
G Chokkalingam, the founder and head of research at Equinomics Research, said the next interest rate rise could be delayed as there is some hope for the resumption of peace talks and a possible resolution to the conflicts in West Asia. The same could result in oil prices ultimately correcting and inflationary conditions receding in India. On the other hand, Nifty is down by 13% this year. However, Nifty earnings are expected to post double-digit profit growth for Q2FY2027.
Considering these factors, Chokkalingam added that it is not appropriate to shift allocation from bonds to equity at this juncture.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
