Interest rates

RateView : CRISIL's outlook on near-term rates

August 2023

July jog

The yield on the 10-year benchmark government security (G-sec; 7.26% GS 2033) opened July at 7.12% and closed at 7.17%, up 6 basis points (bps) from its June close of 7.11%, and within CRISIL’s forecast range of 7.07-7.17%.

The first week of the month saw yields harden, tracking a surge in United States (US) Treasury yields and crude oil prices. Crude prices rose as the market assessed supply cuts announced by Saudi Arabia and Russia for August. The 10-year US Treasury yield hardened 25 bps to close the week at 4.06% due to stronger-than-expected labour market and economic data. In India, the 10-year benchmark paper 7.26% GS 2033 closed the week at 7.16%.

In the second week, yields softened, tracking a decline in US Treasury yields. The 10-year US Treasury yield eased 23 bps to close at 3.83%, due to lower-than-expected US Consumer Price Index (CPI) inflation print. The US headline inflation fell to 3.0% on-year in June from 4.0% in May, while the domestic CPI inflation rose to 4.81% after hitting a 25-month low of 4.25%. The 10-year benchmark paper closed at 7.09%.

In the third week, bonds traded in a narrow price range owing to lack of firm cues. Market participants refrained from placing large bets ahead of the US Federal Open Market Committee (FOMC) monetary policy decision due the following week. The United Kingdom’s CPI inflation rose 7.9% in June, lower than in the previous month. In India, the 10-year benchmark paper closed at 7.09%.

In the fourth week, yields hardened again, tracking a surge in US Treasury yields and crude prices. The 10-year US Treasury yield firmed up 12 bps to close at 3.96% as the FOMC raised the federal funds target range by 25 bps to a 22- year high of 5.25-5.50%, US gross domestic product and goods order data came in above expectations, and The Bank of Japan made a surprise decision on July 28 to loosen its yield curve control policy. The market also expected a spike in domestic inflation owing to inclement weather affecting food prices. The 10-year benchmark paper closed higher at 7.16%.

Coming into August, the Reserve Bank of India’s (RBI) Monetary Policy Committee kept the repo rate unchanged at 6.5% and maintained its policy stance at ‘withdrawal of accommodation’. However, the RBI raised its inflation projection for this fiscal to 5.4%, after having lowered it in June to 5.1% from 5.2%. The RBI has also asked banks to maintain a 10% incremental cash reserve ratio from August 12.

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