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Indian benchmark indices and bonds weakened on Thu. morning after central bank’s minutes on Feb. monetary policy meetings showed members were concerned about accelerating inflation. 10 year bond yields climbed by 11 basis pt. to 7.82%, highest since Feb.2016 while rupee fell as much as 0.5% to 65.083 to a dollar, its weakest level since Nov. 21
The members expressed apprehension on continued inflationary risks, citing factors such as rising food & global crude prices and the govt.’s decision to increase spending to support a struggling agricultural sector starting April.
Factors such as rising oil prices leading to inflation and concerns over govt.’s fiscal imbalances have weighed upon domestic bond markets for some time now. While RBI seems to be buying time, with inflation on a rising trajectory, expectation of rate hike in FY19 has increased, and it could come in early June. Inflation has positive relation with bond yields while an inverse relation with bond prices. Besides, yields have been rising globally. Increase in bond yields increases opportunity cost of investing in other assets, including equities making equity investments less attractive.
