Yield curve can normalise only when RBI reduces rates and this looks to be some time away. Though liquidity is comfortable in the system, banks are still keeping deposit rates high as credit offtake is high and incremental credit deposit ratio is running at levels where credit is growing faster than deposit in absolute terms.
Credit growth at high double digits levels is largely inflationary in nature and RBI will strive to keep it down through high rates and tight liquidity and this will keep the yield curve inverted until credit growth slackens.
Government bonds, SDL and OIS yield movements
During the past week, there were several notable changes in bond yields:
The yield for the 7.18% 2033 bond increased by 4 basis points to reach 7.18%. Similarly, the 10-year benchmark 7.26% 2033 bond saw a 4 basis point increase, reaching 7.21%. The 7.06% 2028 bond's yield increased by 5 basis points, also reaching 7.21%. Meanwhile, the yield for the 5.63% 2026 bond gained 4 basis points, bringing it to 7.20%. In contrast, the long-term paper, represented by the 7.25% 2063 bond, maintained its yield at a steady 7.33%.
The spread between the 10-year and 5-year bonds remained unchanged at zero, compared to a 1 basis point difference in the previous week. The spread between the 15-year benchmark and the 10-year benchmark narrowed to 7 basis points from the previous 8 basis points. Additionally, the spread between the 30-year benchmark and the 10-year benchmark decreased to 14 basis points from the prior 16 basis points over the week.
In terms of the 10-year SDL auction, the cutoff yield increased slightly from 7.44% to 7.47%, while the spread remained stable at 27 basis points.
Lastly, in the Overnight Indexed Swap (OIS) rates, the 1-year OIS yield rose by 6 basis points, reaching 6.97%, while the 5-year OIS yield decreased by 12 basis points to 6.59%.
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