We asked the above question in Dec ’17, when the 10yr GOI yield was 7.09% and featured the below chart for the month of May in our 2018 Economic Calendar. The GOI yield has indeed risen, to 7.77%, within kissing distance of 8%. The US and German 10 Year yields have also risen from 2.38% and 0.31% towards 2.96% and 0.54% respectively. The global bond selloff was largely due to the rally in Brent to 75.5, plus a pick-up in growth and inflation expectations in US and Europe. The GOI 10 Year yield rose also due to the initial fiscal deficit target (17-18) of 3.2% not being met. An interim attempt to control the Govt’s borrowing costs might be underway: through an increase in FPI investment limits for short-dated debt and through more Open Market Operations by the RBI this year. However, with US yields likely to test 3.25% in the medium term, the 10Yr GOI yield should test 8% later this year. Beyond that, in case the US 10Yr happens to break above 3.25% also, then the 10Yr GOI might also rise towards 9.00% in the long-term, perhaps in 2019. For that, we might need Brent to break above $80 and target $90.

CAN LENDING RATES RISE?

Movement in the 10Yr GOI is often mirrored in a similar move (after a lag) in the RBI’s Repo rate and in the SBI’s Lending Rate, as seen alongside. With the RBI MPC members remaining hawkish, it is possible to see a Repo rate hike in the June RBI meeting. Also, since the MCLR is very responsive to the Repo rate, there could be a danger of lending rates also rising by 0.25-0.50%.