India bonds tumble after RBI's first rate hike in nearly four years
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In a bid to combat inflation, the Reserve Bank of India has increased the key interest rate to 5.5%. This decision has led to a notable dip in Indian government bonds in the market. Factors such as climbing global oil prices are further complicating the economic landscape. While the 10-year bond yield remains high, forecasts suggest that interest rates may continue to rise this fiscal year.
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Loading...×Indian government bonds tumbled on Wednesday, as the market braced for higher policy rates after the central bank delivered its first rate hike in nearly four years and indicated that more could be in store.The Reserve Bank of India raised its key interest rate by 25 basis points to 5.5% as expected and shifted its stance to "calibrated tightening" from "neutral," signalling that next moves would be a hike or a pause.
"The shift in policy stance comes as a modest surprise," Sachin Bajaj, chief investment officer at Axis Max Life Insurance, said.
Bonds Corner Powered By India bonds sink deeper on RBI commentary, inflation concerns
Indian government bonds are currently facing notable losses, pushing the 10-year yield to its highest since March 2023. This downturn comes in the wake of hawkish remarks from Reserve Bank of India Governor Sanjay Malhotra about financial stability. Additionally, India's wholesale inflation saw an unexpected rise in September, leading to growing concerns over potential future monetary policy shifts.
Indian bonds slip on higher oil, hawkish RBI governor commentsIndia's benchmark bond breaks 4-day falling streak as value investors returnIndia bonds rise as investors see value after 10-year yield nears 7.40%Bond yields rise to 3-year high on RBI liquidity cut Browse all Bonds News with"Given that current bond yields are already factoring in the possibility of three to four rate hikes during the current cycle, we expect the 10-year bond yield to remain elevated in the 7.25%-7.50% range for this fiscal year."
India's benchmark 6.94% 2036 bond settled at 7.2410%, up 5 basis points from the previous close. It tested a near three-year high of 7.2655% during the policy.
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Bonds have been battered by the Iran war-led jump in oil prices and a global debt rout that have led to rate hikes across the globe.
India, the world's third largest oil importer and consumer, is grappling with rising inflation and a weakening rupee as Brent crude stays atop $100 per barrel and global yields trade at multi-decade highs.
The rupee neared a record low, and stocks declined.
"We maintain a cumulative rate hike of 75bp in this cycle," said Madhavi Arora, chief economist at Emkay Global Financial Services.
The RBI said it may continue using tools such as open market bond sales, variable-rate reverse repos and forex swaps to absorb excess banking-system liquidity. Governor Sanjay Malhotra said that no option, including the central bank's least preferred cash reserve ratio hike, could be ruled out.
The large cash surplus is likely to be exhausted by the end of the financial year, Malhotra said.
RATES
India's overnight indexed swap rates marched higher as an RBI hike compounded the pain from climbing US yields and oil prices.
"We don't quite like chasing rates higher at these levels given how much has been priced in the front-end," MUFG said in a note.
The one-year OIS rate rose 1.25 bps to 6.25%, the two-year rate was up 3.75 bps at 6.4525%, and the liquid five-year rate rose 5.25 bps to 6.7225%.
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Figures reflect the source report and its stated period. This article is for information and is not investment advice.
