In the forthcoming RBI monetary policy meeting, repo rate is expected to be raised by 25 bps with continuation of accommodative policy considering both global and domestic economic factors.
Domestic inflation rose to 4.81% in June from 4.31% in previous month while food inflation spiked to 4.49% in the month. Going ahead, inflation is expected to rise driven by higher vegetable prices which is a major concern for the central bank while considering rate actions.
Globally, central banks continued to raise policy rates. US Fed hiked fund rate by 25 bps to 5.25%-5.50% which is highest since 2001. Maximum 25 bps rate hike is possible in 2023 considering inflation data ahead with an end to rate hike cycle. The ECB also raised the bank rate by 25 bps to 3.75% last month considering the current eurozone inflation rate.
US rating downgrade-The rating agency Fitch has downgraded US Sovereign rating from AAA to AA+ due to factors such as expected fiscal deterioration over next three years, a high and growing general government debt burden and steady deterioration in governance over the last 20 years.
Government bonds, SDL and OIS yield movements
On a weekly basis, the 10-year benchmark 7.26% 2033 yield rose by 3 bps to 7.19%. 7.06% 2028 yield rose by 1 bps to 7.16%. 5.63% 2026 yield rose by 5 bps to 7.16%. Long-term paper, 7.25% 2063 yield increased by 7 bps to 7.37%.
The spread of 10-year bond over 5-year bond rose to 3 bps from 1 bp as compared to the previous week. The 15-year benchmark over 10-year benchmark stood flat at 8 bps as compared to 9 bps while the 30-year benchmark over 10-year benchmark spread decreased to 19 bps from 20 bps on a weekly basis.
10-yr SDL auction cut-off yield rose to 7.45% from 7.40% in previous week while spread stood flat at 30 bps.
On a weekly basis, 1-year OIS yield rose by 2 bps to 6.89% while the 5-year OIS yield increased by 5 bps to 6.55%.
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