In normal markets, RBI hawkishness on inflation would have taken the 10-year government bond yield higher by a minimum of 25bps. RBI has revised its inflation forecast upwards and believes that price pressures are becoming broadbased. On top of higher inflation forecast, economic growth numbers too have been revised higher indication a post covid economic recovery.

The government too came out with a statement on higher spending with the Finance Minister saying that the government will increase spending to push up economic growth. Higher spending is likely to continue into fiscal year 2021-22, which means a large government borrowing program.

RBI anticipating a negative bond market reaction, stated that it will continue to use its tools to protect the yield curve and keep down borrowing costs. The governor also thanked RBI’s friend, the bond market, in maintaining calm in the face of rising inflation and huge bond supply.

The bond market would like to make money and money is made by either going long or short on bonds. In today’s scenario with rising inflation and ultra low rates, shorting bonds is the best option to make money but its friend, the RBI, is making sure that bond market does not earn money by shorting bonds.

In addition to domestic inflation pressures, surging capital flows on a weak USD has added huge liquidity into the system and this will further add to inflation worries. Equity markets are at record highs on FII flows indication an asset price inflation.

Bond markets will have to be patient to short bonds, but it will be the trade of 2021.

Ø CPI inflation is projected at 6.8% for Q3FY21, 5.8% for Q4FY21 and 5.2% to 4.6% in H1FY22

Ø FY21 GDP growth has been estimated to stand at -7.5%

Ø Fiscal deficit stood at 119% of budgeted target during Apr-Oct FY21, in terms of absolute value it came in at 7.96 trillion

Ø Union Government market borrowing stood at Rs 9.33 trillion as of 27^th Nov, 77.75% of FY21 target

Ø During FY21, Rs 404.29 billion of FPI debt outflow so far while Rs 1691.09 billion of inflow made by FPI during the same period

Ø 5.85% GS 2030 was trading at the level of 5.83% just before MPC announcements while it was trading the level of 5.81% after announcements

INR Bonds

Services