Yield on the benchmark 10-year bond hit a two-year high intra-day as it flared past the 6.50-per-cent mark, raising the spectre of higher interest rates on corporate borrowings and even other loans. The 6.10 per cent 2031 bond on Tuesday ended at 6.51 per cent after hitting a high of 6.52 per cent.

Bond yields which had dropped to 5.90 per cent in December 2020 have been chugging northwards feeding on rising oil prices and expectations of higher inflation, with the US Federal Reserve's hawkish signal last month giving an extra zest.

Yields also got a leg-up from the RBI’s moves towards gradual policy normalisation by sucking out liquidity through the variable reverse repo route (VRRR) at rates closer to the repo rate.

The RBI at one time was trying to keep yields around 6 per cent to ensure sufficient liquidity in an economy thirsting for revival after the ravages of the pandemic.

The apex bank’s tight-fistedness through VRRR led to the net durable liquidity surplus falling to Rs 10.90 lakh crore as on December 17 against Rs 11.83 lakh crore on September 10.

Analysts said the impact of rising yields would first be felt on corporate borrowings which could adversely impact their interest costs. This comes at a time rising input prices have already crimped their margins and even affected consumption in certain sectors.

Rising yields would also eat into the books of banks as they could face mark-to-market (MTM) losses on bonds that are held in their available for sale (AFS) and held for trading (HFT) portfolios.

However, sources said no impact may be seen on home loans, particularly those which are related to the policy repo rate. One of the top lenders, SBI, is providing home loans at a special festival rate in the range of 6.70 per cent to 6.90 per cent till March 31.

Loans provided on the basis of external benchmark rate may be tweaked if banks decided to increase their spread.

Sources added that some of the banks may raise other lending rates such as the marginal cost of funds based lending rate (MCLR). SBI had raised its base rate in December by 10 basis points.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is set to meet in February. A section of the bond market feels it could raise the reverse repo rate from 3.35 per cent.

Although concerns of a rise in inflation remain, there are others who are of the view that given the spike in Omicron cases and its impact on economic recovery, the central bank is likely to continue its growth stance and desist from taking any action on interest rates.

Last month, the central bank said that it expects retail inflation to peak in the January-March quarter and moderate thereafter.

The upward movement in yields did not have any impact on equities with benchmark indices continuing their Monday rally on positive global cues.

While the Sensex rose 672.71 points or 1.14 per cent to close at 59855.93, the broader Nifty-50 ended with gains of 179.55 points at 17805.25. This came on the back of rally in heavyweights such as Reliance Industries, which rose 2.22 per cent, banks, financials and auto stocks. Buying was also seen from foreign portfolio investors, domestic institutions and retail investors.

However, the bullish trend in equities did not have a favourable impact on the rupee, which fell 29 paise to close at 74.57 to the dollar, due to the greenback’s strength in overseas markets.