10-Year Bond Yields Reach 7.25% as Lingering 7.44% Inflation Puts Brakes on Policy Rate Cuts

Category : Knowledge Center

As we saw in the last month, due to heavy rainfall, the prices of vegetables had gone up, so in the following article, we will study the raising prices of basic food items and their effects on policy: 

• Inflation and Bond Yields: Inflation is the increase in the prices of goods and services. When inflation goes up, the prices of things you buy also go up. Bond yields are like the interest rates on loans given by the government. When inflation rises, it becomes tricky for the government to lower these interest rates.
• Recent Situation: In India, the prices of things went up a lot in July, especially for vegetables. This caused the inflation rate to shoot up to 7.44%, which is higher than what the government wanted (they were aiming for 2-6%). This rise in inflation made it harder for the government to lower their interest rates.
• Effect on Bonds: On August 17, the interest rates on 10-year government loans (bonds) in India went up to 7.25%, which is the highest in a while. This means people were less interested in buying these bonds because they were getting higher interest rates elsewhere.
• Bond Prices and Yields: Bond prices and yields work like a seesaw. When yields go up (like they did), bond prices go down. This is because if new bonds are offering higher interest, older bonds become less attractive and their prices decrease.
• Recent Data: On August 14, the data showed that inflation was high, even higher than what experts expected. This has been happening for the past 46 months, which is a long time.
• Central Bank's Role: The central bank (like India's RBI) tries to control inflation. They were doing well until now, but in July, inflation rose unexpectedly. Even though the central bank did not raise its interest rates in their recent meeting, they think inflation might remain high for a few months.
• Analyst's Opinion: Analysts thinks that inflation might stay high for a while, and the prices of oil are also a concern. She believes that until inflation becomes stable, the central bank might not change its interest rates. The analyst also thinks that bond yields might stay high for some time.

Summary: The prices of things in India went up a lot, especially for vegetables. Because of this, the government might not be able to lower the interest rates on their loans. This caused the interest rates on these loans to go up, making the loans less attractive for people. So, the prices of these loans went down. An expert thinks inflation might stay high for a while, and until it goes down, the government might not change the interest rates.