Bond markets provide an early clue about the direction of interest rates. And tracking developments there one might just have got the impression that interest rates had peaked.

Borrowing programme

For two consecutive weeks the Government's borrowing programme sailed through — with a slight hiccup though. Banks and other institutions were not very enthusiastic about picking up its 7-year and 10-year paper. The increase in the Government's borrowing programme, announced a couple of weeks ago, did nothing to perk up sentiments.

The market of course wanted higher yields (like any good lender wants when lending to an inveterate borrower). And the Government obviously didn't want to pay more. So, as it happens in such situations, the load fell on primary dealers (those mandated by the Reserve Bank of India to underwrite government securities auctions).

They bought the government paper (about Rs 4,000 crore of the Rs 10,000 crore), that banks and other institutions didn't want to, 10 days ago. The Government, of course, got the money — as it usually does.

But what was interesting was that the market began to interpret this as a sign that interest rates had peaked and the Government didn't want 10- year yields to go beyond 8.78 per cent. The RBI was signalling its discomfort with higher rates, they said. Ergo, there would be a ‘pause' in the rate hiking spree of the RBI.

Inflation woes

But the bad news on the inflation front seems to have changed the equation yet again. Food inflation numbers released last week seem to make a hike of 25 basis points almost certain.

WPI inflation remains high — caused by both supply and demand factors. Fuel and commodity prices are still showing no signs of coming off their highs.

GDP growth

Good monsoons once meant lower food inflation, that hasn't happened this time — not yet. The economy is slowing down and GDP estimates have been lowered.

Consensus forecasts seem to put GDP growth this fiscal in the 7 per cent range.

The RBI has raised its policy rates by a cumulative 350 basis points so far through a dozen hikes over the past 18 months.

Notably, the last hike by the RBI did not result in its transmission by commercial banks.

On the contrary, a few banks even used the ‘festival season' excuse to offer some discounts. They fear that raising rates now will curb their loan growth in an already slowing economy. So, will the RBI be able to make any point if it hikes again? The dilemma is not new.

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