Treasury yield curve inverts briefly: Will it impact India's GDP growth in FY24?
1 min read . Updated: 09 Mar 2023, 04:12 PM IST
Premium- The RBI sold 364-day notes at a 7.48% yield, the highest since October 2018, while the 10-year benchmark 7.26% 2032 bond yield saw a high of 7.4728%, and ended at 7.4547%
On Wednesday, the Indian debt market saw a slight inversion in the yield curve for the first time in around eight years on the back of worsening liquidity deficit in the country's banking system and bets of continued rate hikes.
It all started with yields rising all over the world and in India after US Federal Reserve Chair Jerome Powell said in his testimony to Congress that given the strong economic data, rates may have to remain higher for longer, and even be raised at a faster clip.
The US 10-year bond yield rose to 4% on Monday after the testimony. Reacting to this, the 365-day treasury bill (T-bill) yield in India rose above the benchmark 10-year bond.
The Reserve Bank of India sold 364-day notes at a 7.48% yield, the highest since October 2018, while the 10-year benchmark 7.26% 2032 bond yield saw a high of 7.4728%, and ended at 7.4547%, according to a Reuters report.
“Normally an inversion of the yield curve is regarded as an indicator of imminent recession. But this correlation between yield curve inversion and recession is found only in developed countries, not developing countries like India," said Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
“The inversion happened here due to higher-than-expected cut offs on treasury bills sales, which in turn, was triggered by deficit in the liquidity in the banking system. This declining trend in liquidity and inversion of the yield curve is likely to continue for some more time. But this is not going to impact India’s GDP growth in FY24," said Vijayakumar.
The 364-day T-Bill yield has jumped 58 basis points in the last six weeks amid uncertainty over interest rate hikes, while banking system liquidity moved into deficit which is expected to widen in the coming weeks.
The benchmark 2032 bond yield has risen only 12 bps during the same period, leading to spread compression and ultimately inversion.
India's banking system liquidity deficit widened to more than ₹70,000 crore in February, with the daily average liquidity also slipping into deficit on a monthly basis for the first time since May 2019.
Market participants said the lack of bond supply by the central government in March has been a major reason for the yields at the longer end to remain capped.
With agency inputs