10-year bond yields breach 7%, 1st since July 2019

New Delhi
Yields on 10-year government bonds breached 7% levels for the first time since June 2019 after the Reserve Bank of India (RBI) said that it is now prioritizing inflation over growth. The 10-year bonds closed the day at 7.12% gaining almost 20 basis points from its Thursday close of 6.914%. Bond yields rise in expectation of a likely increase in interest rates or withdrawal of excess liquidity from the market.
“More than what was announced in the policy rates, it is the governor’s statement that inflation takes precedence over growth, and the fact that it raised the inflation estimates the bond moved yields upward,” says Alok Singh, chief investment officer, BoI AXA Mutual Fund.
The RBI governor said that the central bank is finally changing its long-held policy stance of growth over inflation to inflation over growth, given the geopolitical tensions prevalent in Europe. Though rise in government bond yields is significant as several small savings schemes are linked to these rates. However, it is unlikely that it will have any bearings on deposit or lending rates immediately as transmission takes time.
The RBI governor also said that the government is gradually moving away from an ultra-accommodative stance to an accommodative stance. As a step towards this, the introduced Standing Deposit Facility (SDF) – a tool through which it can absorb excess cash from banks without having to give them government securities in collateral.