The benchmark 10-year government bond yields on Friday jumped to near three-year highs after the RBI hinted at gradually moving away from its ultra-loose monetary policy to check inflation.
The 10-year benchmark bond yield rose 20 basis points higher to close the day at 7.12 per cent as against the previous close of 6.91 per cent. The rise in bond yields indicate that liquidity tightening is ahead and interest rates are set to rise.
Analysts said rising yields mean investors expect a rise in interest rates and are, therefore, selling the bond papers they are holding. Since a rise in interest rates would result in decline in bond price of existing bonds (and thereby capital loss on sale before maturity), investors rush to sell in order to limit capital loss.
The bond market is upset at the hawkish note struck by the RBI in the first monetary policy statement of the new fiscal year. The rise in yields means government borrowings will be more expensive, said an analyst.
The RBI has indicated that it will engage in a gradual and calibrated withdrawal of this liquidity over a multi-year time frame in a non-disruptive manner beginning this year.
Why the rise?
rising yields mean investors expect a rise in interest rates and are, therefore, selling the bond papers they are holding. Since a rise in interest rates would result in decline in bond price of existing bonds (and thereby capital loss on sale before maturity), investors rush to sell in order to limit capital loss. The bond market is upset at the hawkish note struck by the RBI in the first monetary policy statement of the new fiscal year.
Meanwhile, the rupee appreciated 13 paise to settle at 75.90 against the US dollar on Friday after the RBI maintained status quo on the benchmark lending rate.
On the domestic equity market front, the 30-share BSE Sensex ended 412.23 points or 0.70 per cent higher at 59,447.18, and the broader NSE Nifty surged 144.80 points or 0.82 per cent to 17,784.35.
Meanwhile, oil prices were stable on Friday, as per a Reuters report, but remained on course for a second weekly fall after countries announced plans to release crude from their strategic stocks. Brent crude futures were up 7 cents, or 0.08 per cent, at $100.67 a barrel by 10:41 am ET. US West Texas Intermediate crude futures rose 30 cents to $96.32. Both contracts are set to fall for a second consecutive week.
