Indian bond yields which rose following the rate hike, have erased all their gains
The Reserve Bank of India (RBI) raising interest rates was a surprise for all markets, including our bond market. The benchmark 10-year bond yield which rose to as much as 9 basis points after the announcement of the hike, fell down to about 8.72 per cent. The fall came after RBI Governor Raghuram Rajan assured that there might no further policy tightening if inflation came down as expected. Even though the Consumer Price Index (CPI) had fallen to 9.8 per cent in December, it remains well above RBI’s repo rate of 7.75 per cent. If inflation keeps coming down, there may be no need for policy tightening. Says Kunal Shah, Fund Manager - Debt, Kotak Mahindra Old Mutual Life Insurance, “for bond markets this will be positive news as uncertainty on extent of hikes will be removed and if inflation does indeed fall sharply expectations on rate cuts will emerge.” This means that Government bond yields might remain stable. Says Arun Gopalan, VP – Research & Investments, Systematix Shares, “the long term yields are expected to remain high with the 10 year G-Sec hovering between 8.70-8.80 per cent.”
This could also mean more corporate bond offerings in the near future as corporate borrowing costs for companies go up. Says Naresh Takkar, MD & CEO, ICRA, “the move will be negative for industry as borrowing costs are likely to inch up.” So, corporates might look to the public to raise funds. In such a case, investors should go for only highly rated securities. However, the disadvantage here is the possible increase in defaults by corporates. Says Deep Mukherjee, Director – Corporates, India Ratings, “the interest rate hike by RBI would impose a marginal stress on the debt position of corporates. Another 25 bps hike might cause significant damage and would be detrimental to corporate default.” As we mentioned in our issue ‘Your Money in 2014’, dated January 2014, corporate defaults of unrated/low rated securities are likely to increase. Investors should keep track. Also, this might be the right time to invest in bank Fixed Deposits (FD) as rates would remain quite attractive till the end of this financial year.