RBI repo rate may climb to 6% in FY27; G-Sec yields face upward pressure: Report
RBI is expected to raise the repo rate by 25 basis points in October, with one or two more hikes possible in FY27, taking the benchmark rate to 5.75-6%, according to a Union Bank of India report.
The Reserve Bank of India is anticipated to increase the repo rate by 25 basis points in October, with additional rate hikes possible in FY27 due to ongoing inflation concerns, which could see the benchmark rate reach 5.75-6 percent, according to a report by Union Bank of India. As reported, Indian government bonds faced pressure in September, with high crude oil prices, rising global yields, and expectations of RBI rate hikes contributing to the downward pressure.
Additionally, the rising domestic bond supply, including RBI open market operation (OMO) sales and increased long-tenor issuance, contributed to elevated yields despite lower overall government borrowing. This pressure was notably seen in the 5-year segment, where the 5-year G-Sec yield increased by 45 basis points in September, compared to 24 basis points for the 10-year bond, narrowing the 10-year minus 5-year spread from 36 to 16 basis points.
The government plans to borrow a gross amount of Rs 7.86 lakh crore in the second half of FY27, with a gap of around Rs 1.1 lakh crore between the budgeted and projected gross borrowing. However, net borrowing is expected to remain stable due to reduced redemptions and deferred repayments caused by bond switches. To manage the surplus, the central bank continues to utilize FCNR(B)-led surplus through variable rate reverse repo auctions, OMO sales, and foreign exchange swaps.
The report suggests that a broad cash reserve ratio (CRR) hike is unlikely, as the RBI has already exempted eligible FCNR(B) deposits from reserve requirements. Instead, a 25 basis point rate hike is expected, followed by one or two more hikes during the remainder of FY27, potentially bringing the repo rate to 5.75-6 percent. This move would be accompanied by hawkish guidance to indicate continued vigilance on inflation, with a possible upward pressure on the 10-year G-Sec yield if policy tightening coincides with persistently high crude prices, rising global yields, and subdued auction demand.
Written by urgent.news from The Economic Times - Economy's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
