17 Apr 2022

Rising interest rate cycle to continue for minimum 3 years

High and rising inflation expectations, heavy borrowing by government, ultra-low policy rates, all point to a longish rising interest rate cycle where RBI will have to continuously raise rates to bring policy to even neutral levels. Bond markets will play for rising bond yields and investors will have to position their investments for higher interest rates and inflation.

author dp
Team INRBonds
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G-sec yields have risen by 150bps from lows seen post covid and this seems to be just the beginning of a rising interest rate cycle that could go on for a minimum period of 3 years. RBI has yet to raise the repo rate from record lows and also needs to step in to support a high government borrowing program, which hampers their efforts to manage liquidity. Inflation too is rising with CPI inflation at close to 7% in March 2022.

Globally too centrals banks from US to Eurozone are fighting very high inflation and interest rates will have to continuously rise for a long period of time for policy normalisation. This can lead to high risk aversion in markets that will cause further volatility in interest rates in India. 

Domestic Inflation- India’s consumer inflation touched 17-month high at 6.95% in March 22 from 6.07% in previous month. The rise in inflation was driven by surge in food and fuel prices. During the month food inflation stood at 7.68% on yearly basis. Core inflation remained at 6.53% during March 22.

US Inflation- US consumer inflation soared to 41-year high level at 8.4% in March 22 driven by surge in gas price and housing and food cost.

 

Government bonds, SDL and OIS yield movements

Last week, 6.54% 2032 paper yield rose by 9 bps to 7.21% while 6.10% 2031 yield soared by 40 bps to 6.26%. The 5-year benchmark bond, 6.79% 2027 yield jumped by 24 bps to 6.84%. 6.64% 2035 yield rose 29 bps to 7.45%. Long-term paper, 6.99% 2051 yield decreased by 12 bps to 7.52%.

The spread of 10-year bond over 5-year bond declined to 37 bps from 52 bps in previous week. The 15-year benchmark over 10-year benchmark spread increased to 23 bps from 22 bps while 30-year benchmark over 10-year benchmark spread decreased to 31 bps from 28 bps on weekly basis.

On weekly basis, 1-year OIS yield rose by 26 bps 4.99% while 5-year OIS yield increased by 40 bps to 6.58%.

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