The RBI governor in an interview said “Any hasty withdrawal of monetary policy support will negate the nascent or incipient recovery that is taking place.” Due to the indication that the accommodative stance is likely to continue, bonds rallied on 8th July 2021. It seems that the expected increase in inflation is also contributing to the accommodative stance of RBI. Domestic bond yields had been falling due to contraction in US yields from 1.5% to 1.25% in the last few trading sessions. The fall in crude oil prices of almost $1 worked to ease investors’ sentiments, however, the RBI governor statement removed all uncertainty surrounding the RBI’s actions post the Consumer Price Index (CPI) increase of 6.03% in May 2021.
In another statement, the RBI governor also mentioned that the higher expected June CPI will be transitional and should ease from the third quarter of FY 2021-22. Post these two comments bond yields fell. The benchmark five-year bonds fell 9.3 basis points (bps) on Thursday, followed by a 9 bps fall in the four-year bonds. The 14-year bond fell 5.6 bps to close at 6.73%. In two days, the 14-year bond has fallen about 15 bps in response to the fall in US 10-year bond yields.
Additionally, the RBI has issued a new10-year benchmark bond today, 9th July 2021. Falling yields have given RBI the opportunity to set a low coupon rate for the new bond. It is also expected that the cut-off for the 10-year bond could reach around the 6% mark. Due to the statement made by the RBI governor, doubts with regard to normalization around October 2021 have risen particularly since mass vaccination is one of the key influencing factors for economic recovery and growth. It is likely that mass vaccination could be achieved only by the year-end due to the vast population of India thereby dampening normalization hopes.