The Reserve Bank of India RBI Deputy Governor Michael Patra said on Wednesday that the central bank moderating the size of rate hikes was a fundamental guidance given by the Monetary Policy Committee MPC of The RBI, which announced a 35 basis point increase in the repo rate to 6.25 per cent on Wednesday.
Before Wednesday s move, the previous three rate hikes by the MPC were each of 50 basis points bps India s sovereign bond market seems to believe that a reduced tightening despite the fact that the central bank's rate hike cycle has some distance to go.
The 10 year bond yield rose past the psychologically significant 7.30 per cent mark on Wednesday before easing back to 7.27 per cent, two bps higher than the previous close. Bond prices and yields move inversely.
The yield on shorter-tenure bonds, which are extremely sensitive to interest-rate expectations, went up much more than the 10 year bond yield on Wednesday. The yield on the one-year paper went up 11 bps while the yield on the five-year bond rose 6 bps.
HDFC Bank's treasury research team believes that the 10 year yield will be in the range 7.25 -- 7.35 per cent over the near term.
The MPC s repo rate hike may have been in line with the bond market expectations but Governor Shaktikanta Das repeated emphasis on core inflation headline inflation minus food and fuel inflation at elevated levels, which dampened hopes of central bank ending rate hikes.
In a note released after the MPC statement, Nomura s economists predicted a 25 basis point rate hike in February.
The consumer price index momentum remained high, as the main risk was that core inflation remained sticky and elevated.
Core inflation is expected to come down from 6 per cent levels around April-June of next year. Naveen Singh, head of trading, ICICI Securities Primary Dealership, said that a rate hike in February is a live option.
Some analysts believe that by moderating the pace of rate hikes but still sound vigilant on inflation, the government was looking to protect the rupee.
At a time when the Fed is seen continuing with rate hikes, anticipating the end of rate hikes, and narrowing the rate differential between India and the US could hurt the rupee by emboldening speculation against the domestic currency.
Today s policy announcement provides soft support for the rupee ahead of the Fed meeting next week and can be viewed as an attempt by the RBI to align itself with the still hawkish G 7 central banks, HDFC Bank s treasury desk wrote.
The rupee went up 14 paise to close on Wednesday at Rs 82.48 against the dollar.
A decline in GDP growth in July-September was a factor that led to market expectations of a less aggressive RBI, which would make the case for slower rate hikes. The yield on the 10 year benchmark paper had fallen to a two-and-a-half month low of 7.21 per cent on December 1.