NEW DELHI: Yields on 10-year government bonds breached 7% levels for the first time since June 2019 after the Reserve Bank of India (RBI) said that it is now prioritizing inflation over growth. The 10-year bonds closed the day at 7.12% gaining almost 20 basis points from its Thursday close of 6.914%. Bond yields rise in expectation of a likely increase in interest rates or withdrawal of excess liquidity from the market.
“More than what was announced in the policy rates, it is the governor’s statement that inflation takes precedence over growth, and the fact that it raised the inflation estimates the bond moved yields upward,” says Alok Singh, chief investment officer, BoI AXA Mutual Fund.
The RBI governor said that the central bank is finally changing its long-held policy stance of growth over inflation to inflation over growth, given the geopolitical tensions prevalent in Europe. Though rise in government bond yields is significant as several small savings schemes are linked to these rates. However, it is unlikely that it will have any bearings on deposit or lending rates immediately as transmission takes time.
The RBI governor also said that the government is gradually moving away from an ultra-accommodative stance to an accommodative stance. As a step towards this, the introduced Standing Deposit Facility (SDF) – a tool through which it can absorb excess cash from banks without having to give them government securities in collateral.
The SDF rate will be 25 bps below the policy rate (repo rate of 4%). The Marginal Standing Facility (MSF) rate will continue to be 25 bps above the policy repo rate.
‘No rupee-rouble payment platform yet’
The RBI has refuted reports that it is facilitating any rupee-rouble payment platform. The RBI governor Shaktikanta Das said that it is not working on any such payment system, and that it will not do anything that goes against the global sanctions on Russia. The governor reiterated that the Central bank will have to be sensitive to the sanctions. The governor, however, admitted both importers and exporters are facing problems in making payment (for trades with Russia) and they have made representation with both the government and the RBI. He said as and when any (alternate) system is worked out, it will make an announcement, but for now no such system has been in place. The government has in parliament said that an inter-ministerial group led by the finance ministry is seeing how the payments issue can be addressed.