Inflation spurs spike in bond yield; rupee hits 1-month low

Inflation spurs spike in bond yield; rupee hits 1-month low

Subject : Economics

Context : India’s benchmark 10-year bond yield closed at its highest level in more than six weeks while the rupee ended at a one-month low on the back of a larger-than-expected surge in retail inflation.

Concept:

• The benchmark 10-year bond yield ended at 6.04%, after touching 6.05%, its highest since April 30 and up 4 basis points on the day.
• Retail inflation rate rose 6.3% year-on-year in May, from 4.29% in April and sharply above analysts’ estimate of 5.3%. The wholesale price inflation rate rose 12.9%, its highest in at least two decades.

Bond Yields

• Bond yield is the return an investor realizes on a bond. The mathematical formula for calculating yield is the annual coupon rate divided by the current market price of the bond
• Bond: Is an instrument to borrow money. A bond could be issued by a country’s government or by a company to raise funds.
• Coupon Rate: It is the rate of interest paid by bond issuers on the bond’s face value.
• Yield curve: It is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates.
• The slope of the yield curve gives an idea of future interest rate changes and economic activity.

Factors affecting the yield:

• Monetary policy of the RBI (interest Rates), fiscal position of the government and its borrowing programme, global markets, economy, and inflation.
• A fall in interest rates makes bond prices rise, and bond yields fall.
• Rising interest rates cause bond prices to fall, and bond yields to rise.
• To control high inflation: the interest rate is increased.