A 25 basis point increase in the repo rate was almost a foregone conclusion. This explains why the Indian Rupee and the 10-year G-Sec yields remained stable for the initial part of Reserve Bank of India Governor Sanjay Malhotra’s monetary policy speech. By the end of the speech, it started looking different.
A few questions surfaced after the speech, and some of them remain unanswered even now – how deep should one anticipate the rate hike cycle to be? With mixed signals emerging, a lot is being left for inference at this stage.
Consequently, the 10-year G-Sec bond yields touched a new 18-month high of 7.27 percent, to somewhat cool off towards the end of the day to 7.22 percent (yet, up 3 bps from Tuesday’s close). At 7.22 percent, yield traded at a near one-year high, indicating that the street expectation is that of more hikes.
The Indian rupee meanwhile took a trip of its own, depreciating about half a percent to breach the 96.80 per US dollar mark briefly. While it ended the day’s trade at 96.77 per US dollar, the fact that INR didn’t react positively to the October 7 MPC could signal more trouble for Indian currency. The impact of bonds and the rupee was also felt in the stock market, with 400 points knocked off the BSE Sensex, which closed the day in red at 72,638 levels.
The question then is how should ‘calibrated tightening’, a new stance introduced on October 7 which left the street confused, be interpreted?