Bond yields nearing pre-pandemic level of 6.8%

Mumbai: Guiding towards hardening yields of the benchmark bonds to pre-pandemic levels of 6.4-6.8 per cent this quarter and the resultant faster policy normalisation, a report has said better risk pricing always results in better price discovery in the financial markets.

Amid the Fed tapering talks, domestic yields have been steadily rising in a narrow band, and the yields are expected to continue northwards in Q4 as the benchmark G-secs rates could move in the range of 6.4-6.8, which is pre-pandemic level, even though the signalling repo rate may be capped at four per cent at the next policy meeting, SBI chief economist Soumya Kanti Ghosh said in a report.

Through much of FY23, a spread of 275 bps over the repo rate may be the risk spread, given the demand-supply inequality and this means that better risk pricing always results in better price discovery in markets, Ghosh added.

His optimism is partly driven by historical data and partly given by the ebbing of the Omicron wave into a less severe endemic even as the evolving geopolitical developments in Yemen and Ukraine lead to a spike in crude prices, which may stay in that range for the near term at around $90 a barrel. Amid all this, there is a silver lining - the markets may have factored in that the current Omicron will result in an endemic stage in the Covid cycle and thus a faster normalisation of economic activities.

Additionally, in any rate hike cycle, the financial markets do better, as any material risk is factored in the prices. Interestingly, the call rates are currently much higher than the reverse repo rate, and the stage is set for a reverse repo normalisation. In our context, during the growth boom for the three years ending 2008, when the signalling rate/repo rate jumped by 275 bps, the Nifty had jumped by 79.1 per cent and for the two years ended 2011, when rates jumped by 375 bps, the Nifty jumped by a staggering 54 per cent, indicating that better risk pricing always results in better price discovery in markets, Ghosh said.