RBI May Have To Tolerate High Yields While Prioritising Inflation – Experts Suggest

The Reserve Bank of India (RBI) would have to emphasize managing competitive pressures in the market and enabling interest rates to rise as a result of April’s inflationary shock.

On May 13, several economists and mutual fund experts contacted by Moneycontrol predicted that the RBI would not vigorously defend rising bond yields, but instead would keep going withdrawing excess solvency position and strategy regularisation at a quicker speed to bring inflation back within its target range.

At a time when inflation is growing, according to Debendra Kumar Dash, director of corrected at AU Small Finance Bank, the RBI has “no scope” to maintain yields down or undertake OMOs (liquidity).

Headline inflation in April hit an 8 high of 7.79 per cent, up 84 basis points from March’s 6.95 per cent, according to data published on May 12. One-tenth of a percentage point is equal to one bps.

For the fourth time in a month, April’s reading exceeded the attributes of the RBI’s tolerances ceiling. The RBI is required to target prices at 4%, with a 2 tolerance limit along either side, under the monetary policy framework.

The RBI Voting

That after Monetary Policy Committee (MPC) voted in support of a 40-basis-point repo rate increase on May 4 after an unexpected meeting, the debt market was waiting to see what the latest inflationary number would be.

Bond rates have already risen due to a record bond issuance, aggressive foreign policy adjustment by the US Reserve Bank, and rising commodities prices. On May 9, the yield on the outstanding 10-year bond reached a three-year high of 7.49 %, up from 6.9% on April 4.

The CRR, or Cash Reserve Ratio, is the proportion of assets that banks must keep in cash available. The RBI increased the CRR from 4% to 4.5 per cent this week.

Bond Market Agony Will Intensify

As the country’s debt supervisor, the RBI is required to balance out the spending schedule and continue to borrow prices low. Generally, the central bank sets bond rates by purchasing securities on the open market and using other measures to encourage banks to buy securities.

In the present situation, the reserve bank is on a tightrope, as it must fight inflation while sucking off surplus funds and preserving the rupee from plummeting. Treasury yields and rates are inversely proportional.