Yield may continue northwards in Q4: Report

We believe that the redemption pressure of the Government is going to be significantly large and will peak in FY27 at Rs 6.25 lakh crores. The redemption of G-secs is particularly large beginning FY23. What is more significant is that average oil bond redemption at Rs35,000 crore will be an added headache from FY24 onwards. Considering all this, the RBI and the Government in conjunction will have to dolarge switches in next couple of years to manage the redemption as apart of signalling," says SBI group's chief economic advisor, Soumya Kanti Ghosh

Mumbai: The yield is expected to continue northwards in Q4. A SBI's internal report believes that G-sec rates could move in the range of 6.4-6.8 per cent (pre pandemic level). It also expects that even though signalling repo rate may be capped at 4 per cent by the RBI, through much of FY23, a spread of 275 points over repo ratemay be risk spread given the demand supply inequality. It is expected that crude price might stay high in near future at current levels.

Yields in India have steadily risen in narrow band. Surprisingly, the market participant as gauged from latest RBI professional forecaster survey underpriced the impact of rise in yield in response to Fed announcement.

However, amidst all this, there is a silver lining. The markets mayhave factored in that the current omicron will result in an endemic stage in the Ccovid cycle and thus a faster normalization of economicactivities. Additionally, in any rate hike cycle, the financial marketactually does better as any material risk is factored in the prices.Interestingly, for India, with TREP and call rate currently at muchhigher than reverse repo rate, we believe the stage is set for areverse repo normalization.

In the Indian context, during the growth boom for 3-year periodended 2008, when the signalling rate/repo rate jumped by 275 basispoints, the NSE Index had jumped by 79.1 per cent. Interestingly, forthe 2-year period ended 2011, when rates jumped by 375 basis points,NSE Index did jump by a staggering 54 per cent. Clearly, better riskpricing always results in better price discovery in markets.

"We believe that the redemption pressures of the Government is goingto be significantly large and will peak in FY27 at Rs 6.25 lakhcrores. The redemption of G-secs is particularly large beginning FY23.What is more significant is that average oil bond redemption at Rs35,000 crore will be an added headache from FY24 onwards. Consideringall this, the RBI and the Government in conjunction will have to dolarge switches in next couple of years to manage the redemption as apart of signalling," says SBI group's chief economic advisor, SoumyaKanti Ghosh.

Global recovery has started losing momentum, impacted by resurgence ofinfections in several parts of the world, supply disruptions and thepersistent inflationary pressures.Two events – Yemen Conflict and Ukraine Conflict - have somewhatunsettled the outlook in 2022. With inflation persisting at highlevels, several EMEs were first off the mark in normalising and eventightening monetary policy. In AEs too, persistent price pressureshave induced some of them to raise policy rates. Federal Reserve (Fed)has dropped any reference to inflation as "transitory," with the Fedinstead acknowledging that price increases had exceeded its 2 per centtarget "for some time." Build up to first Fed meeting has already seensharp correction in equity prices and rise in treasury yields in theUS.