Yields on the 10-year benchmark government bonds closed a shade below 8% — it’s highest level in two and a half years — a day after the Reserve Bank of India (RBI) increased the repo rate for the first time in four and a half years, citing rising inflation.
The yields ended Thursday at 7.99%, as compared with its previous close of 7.92%. On Wednesday, following the central bank’s decision to increase the rate, bond yields climbed 8 basis points.
At the second bimonthly monetary policy review for the fiscal, the RBI, while raising the inflation projection for FY19, said the outlook for inflation had become uncertain due to surging crude prices and rising inflationary expectations. Market participants said the outlook on yields will be shaped by the central bank’s outlook on inflation.
Since any rise in yields results in mark-to-market losses for banks, the banking regulator has allowed lenders to spread their bond losses incurred during the current quarter equally over four quarters.
The rupee, which gained on Wednesday after the RBI’s rate decision, weakened against the dollar on Thursday, falling 20 paise to 67.12 per dollar, as a revival in global crude prices gave rise to concerns on the fiscal front.