Highlights:
� Marginal standing facility (MSF) rate and the bank rate remain unchanged at 4.25%
� The reverse repo rate also remains unchanged at 3.35%
� FY22 real GDP growth projection unchanged at 9.5%
� RBI maintained its forecast for consumer inflation for the entire financial year ending March 2022 at 5.3% and revised its forecast to 5% in the first quarter of FY23 from 5.2%
High yield bonds to see high traction
RBI is keeping rates low and liquidity high in the system despite risk from inflation and from Fed policy taper and high US inflation that is at 6%, even higher than India inflation. The gsec yield curve is unlikely to move up from here too much given low rates. 10 year gsec at levels of 6.36% is close to post pandemic highs.
PSU and AAA and AA+ rated bonds too are yielding low returns between 4.5% to 7% across 1 to 10 year maturities.
Bond investors are facing the prospect of very low yields for gsecs, PSUs and AAA rated bonds, which is lower than inflation and earning negative real yields.
Investors will have to shift to higher yielding bonds down the rating scale for earning any positive real returns. Given prospects of economic recovery, pick up in demand for consumption and investment, there will be more borrowing from lower rated issuers as they borrow for working capital and capex and this will feed the demand from investors.
Government bonds and OIS yield movements
6.10% 2031 yield was down marginally at 6.36% post policy. 5-year benchmark bond, 5.63% 2026 yield fell to 5.69%. 6.64% 2035 yield declined to 6.74%.
1-year OIS yield fell to 4.24% while 5-year OIS yield fell to 5.27%.
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