Spread between five-year and liquid 10-year benchmark bond yields compresses, as market participants anticipate more rate hikes in coming months, after another 50 bps move from the Reserve Bank of India.
The five-year bond yield was trading at 7.06% at 0900 GMT, while the 10-year bond yield was at 7.30%, with spread shrinking to 24 basis points against 30 basis points at the beginning of this week.
"After yesterday, traders had started anticipating a pause, but after the policy, it is aptly clear that we would have more rate hikes in the upcoming policy meetings, and hence the five-year yield is seeing a larger reaction," said Vijay Sharma, a senior executive vice president at PNB Gilts.
The RBI raised the key rate on Friday, the third increase in the current cycle to cool stubbornly high inflation that has remained above the central bank's tolerance band for six straight months. The RBI targets inflation in 2.00%-6.00% band.
"Inflationary pressures are broad-based and core inflation remains at elevated levels. The volatility in global financial markets is impinging upon domestic financial markets, including the currency market, thereby leading to imported inflation,” RBI Governor Shaktikanta Das said.
The RBI maintained its inflation forecast for the current financial year at 6.7%, which the traders are taking as hint of at least 60 basis points more rate hikes over the next few months.
"We expect the spread to shrink more or at least remain around the current levels, as selling pressure at the shorter end will sustain, while falling oil prices and U.S. yields could help the 10-year part of the curve," a trader with a state-run bank said.