Tweet
In its Credit Policy review last week, the Reserve Bank of India (RBI) increased the policy repo rate by 40 bps to 4.4% p.a. and hiked the Cash Reserve Ratio (CRR) by 50 bps (taking it to 4.50%). Prior to the current increase, the repo rate was kept unchanged at 4% since May 2020.
RBI did maintain the “accommodative” policy stance but with the focus being on withdrawal of accommodation to ensure that inflation remains within the target going forward along with supporting growth. Further, the RBI governor highlighted that it was only a partial reversal of the total repo rate cut of 115 bps which the MPC had undertaken post the outbreak of COVID-19 pandemic, thereby indicating further potential hike (or series of rate hikes) in the coming months to counter inflation.
Impact on the yields
Whilst the RBI action on policy rates was largely expected in the Monetary Policy Committee (MPC) meeting scheduled next month (June 2022), the urgency of policy action caught the markets by surprise leading to a surge in government bond yields across the curve, with yields at the shorter end rising at a faster pace.
The following table shows a comparison of yields on Government Bonds of various terms as at 31 March 2022 and 09 May 2022 (at the time of drafting this update):
Source: www.investing.com
Impact on Actuarial Valuations
From an actuarial valuation perspective, a rise in the yields results in a rise in the discount rate used in actuarial valuation of employee benefits, which in turn results in a fall in liabilities and consequently expenses, all else being equal. It may be noted, however, that the extent of the impact will vary from company to company, depending upon individual circumstances and facts.
Whilst the yields are likely to trade with an upward bias in the near term, we believe that the volatility in the fixed income market is likely to remain at heightened levels in the near term due to various factors such as the surprising shift and urgency in RBI’s policy, elevated commodity and energy prices, large Government borrowing programs, resilient CPI and WPI, high SLR holding of banks, accelerated tightening by major global central banks etc. Given this, we believe that the yields shall need to be monitored regularly to assess the ongoing impact on the actuarial valuation of employee benefit liabilities. We will keep you posted on any developments on this front.
RBI did maintain the “accommodative” policy stance but with the focus being on withdrawal of accommodation to ensure that inflation remains within the target going forward along with supporting growth. Further, the RBI governor highlighted that it was only a partial reversal of the total repo rate cut of 115 bps which the MPC had undertaken post the outbreak of COVID-19 pandemic, thereby indicating further potential hike (or series of rate hikes) in the coming months to counter inflation.
Impact on the yields
Whilst the RBI action on policy rates was largely expected in the Monetary Policy Committee (MPC) meeting scheduled next month (June 2022), the urgency of policy action caught the markets by surprise leading to a surge in government bond yields across the curve, with yields at the shorter end rising at a faster pace.
The following table shows a comparison of yields on Government Bonds of various terms as at 31 March 2022 and 09 May 2022 (at the time of drafting this update):
| Term of Bond (Years) | Governments Bond Yields (Annualized) as at the end of | Current vs. 31-March-22 | |
| 31-Mar-22 | 9-May-22 | ||
| 1 | 4.37% | 5.56% | 1.19% |
| 5 | 6.19% | 7.41% | 1.22% |
| 10 | 6.96% | 7.61% | 0.65% |
| 15 | 7.29% | 7.83% | 0.54% |
| 30 | 7.40% | 7.92% | 0.52% |
Impact on Actuarial Valuations
From an actuarial valuation perspective, a rise in the yields results in a rise in the discount rate used in actuarial valuation of employee benefits, which in turn results in a fall in liabilities and consequently expenses, all else being equal. It may be noted, however, that the extent of the impact will vary from company to company, depending upon individual circumstances and facts.
Whilst the yields are likely to trade with an upward bias in the near term, we believe that the volatility in the fixed income market is likely to remain at heightened levels in the near term due to various factors such as the surprising shift and urgency in RBI’s policy, elevated commodity and energy prices, large Government borrowing programs, resilient CPI and WPI, high SLR holding of banks, accelerated tightening by major global central banks etc. Given this, we believe that the yields shall need to be monitored regularly to assess the ongoing impact on the actuarial valuation of employee benefit liabilities. We will keep you posted on any developments on this front.