Bond Yield Climbs To 6.07%, Prices Fall; Inflation Concerns Loom

The yield on 10-year government bonds which was already clinging at high levels soared today (August 21, 2020) even further to a 3-month high of over 6%. At around 1:43 pm, bond yield quoted at 6.04%. This is after RBI's minutes of the last monetary policy committee (MPC) meet between August 4 and August 6 released Thursday suggested that the MPC members were concerned about inflation, creating doubts over possible cut in key policy rate going forward.

Bond Yield Climbs To 6.07%, Prices Fall; Inflation Concerns Loom

It is to be noted that bond yields and bond prices share inverse relationship, so while bond yields are rising, bond prices are falling.

Also, the panel of the MPC deliberated deeply regarding the potential challenges that may arise on account of CPI inflation being at higher levels than RBI's mandate for now nearly 3 quarters. And at the same time, they discussed on the probable supply side difficulties as a result of Covid 19 disruption before deciding on to continue with accommodative stance to help the ailing economy. "If inflation persists above the upper tolerance band for one more quarter, monetary policy will be constrained by mandate to undertake remedial action, including an immediate and more than proportionate response to head off the build-up of inflation pressures and prevent it from getting generalized," according to Michael Patra, MPC member and RBI deputy governor

For the July month, retail inflation measured by CPI or consumer price inflation index jumped to 6.9%, surpassing RBI's upper band of inflation target set at 4% and +/- 2%. "On account of the lingering rise in coronavirus cases in the country, coupled with localized lockdowns in the country, inflation will continue to remain at elevated levels in the next few months, albeit with some moderation. Supply disruptions in food components will keep food prices at elevated levels. However, release of kharif crops into the markets could ease food inflation to some extent", according to Care Ratings' 13 August report.

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