7 Essential Policy Rates That Can Make or Break Your Bond Investments

The Reserve Bank of India’s policy rates have a significant impact on fixed income returns. The key policy rates that make a significant impact on the fixed income market prices and their yields. The list of the policy rates and their current values as of July 2024 are as follows:

1. Repo Rate: 6.50%
2. Standing Deposit Facility Rate: 6.25%
3. Marginal Standing Facility Rate: 6.75%
4. Bank Rate: 6.75%
5. Fixed Reverse Repo Rate: 3.35%
6. Cash Reserve Ratio (CRR): 4.50%
7. Statutory Liquidity Ratio (SLR): 18%

The Monetary Policy Committee (MPC) issues a bimonthly monetary policy statement. The upcoming MPC meeting dates are as follows:

• August 6-8, 2024
• October 7-9, 2024
• December 4-6, 2024
• February 5-7, 2025

Impact of revision of policy rates on fixed income market value:

1. When the RBI cuts the policy rates, for example, the repo rate, the market value of fixed income instruments (e.g.,debt MF, non-convertible debt, tax-free bonds, etc.) tends to rise.
2. Also, if the rate cut is against market expectations, the rise tends to be sharper.
3. Similarly, if the policy rates are increased, the market value of the fixed income instruments would come down.

Interest rates and bond yields

Bond yields are closely tied to interest rates set by the RBI. As the policy rates change, the yields on government bonds (G-secs) and corporate bonds also change in tandem. When policy rates decrease, bond yields tend to decline. Conversely, when policy rates increase, bond yields rise, leading to lower bond prices. Most government bonds in India are issued as fixed-rate bonds and have a fixed coupon rate for their entire maturity period.The nomenclature or naming convention of fixed income instruments is as follows:

• G-Sec: 522 GS2025-GS indicates a Government Security with an annualized interest rate of 5.22% and a maturity year of 2025.
• SDL: 709UP30-SG refers to a State Development Loan with an annualized interest rate of 7.09%, issued by the state of Uttar Pradesh, maturing in 2030.
• T-bill: 364D221222-TB represents a Treasury Bill with a tenure of 364 days, maturing on December 22, 2022.

Investors in fixed-income instruments should closely track the RBI policy rates to understand the impact on the bond price and its yield.

Source for data: Reserve Bank of India