India bonds set to slide after RBI signal
Indian government bonds are poised for a selloff in early trading Thursday after the Reserve Bank of India’s latest policy minutes suggested potential rate hikes ahead, despite holding rates steady in its August meeting.
The yield on the benchmark 6.94% 2036 bond is expected to open between 6.80% and 6.85%, up from Wednesday’s close of 6.8170%, according to a trader at a private bank. A gap higher at the open is likely, though whether the yield stays above 6.85% remains unclear.
Minutes reveal hawkish undertones
The RBI’s monetary policy committee voted unanimously on August 5 to keep the repo rate at 5.25% and maintain its neutral stance. The minutes, released Wednesday, showed growing caution among policymakers.
While inflation hasn’t spread widely, RBI Governor Sanjay Malhotra noted that headline inflation was rising from its recent lows. Deputy Governor Poonam Gupta stated that room for further rate cuts had disappeared and that a hike could be necessary later in the fiscal year.
India’s consumer inflation reached 4.45% in July, within the RBI’s 2-6% target but moving closer to the 4% midpoint. The change in tone surprised markets, with traders now expecting tighter monetary conditions ahead.
Related: Envelop secures Lloyd’s syndicate approval
Oil prices add to inflation concerns
Brent crude near $92 a barrel has intensified worries. Tensions between the U.S. and Iran have maintained high prices, increasing risks of imported inflation for India, which imports most of its oil.
Rising crude threatens to weaken the rupee and push up domestic prices, straining the current account and fiscal balances. The RBI’s decision to end its discounted swap facility for diaspora deposits early has also hurt sentiment by reducing liquidity support for the currency.
Overnight indexed swap rates climbed across the curve. The one-year rate closed at 5.8075%, the two-year at 6.0475%, and the five-year at 6.3975%—all higher than in recent sessions.
The bond market’s response shows a shift in expectations. Traders had previously bet on steady or lower rates as inflation eased. With the RBI now signaling a possible change, the outlook has shifted. The focus is on how much yields may rise and the impact on a government already facing high borrowing costs.
A move above 6.85% on the 10-year bond could prompt more selling, especially from foreign investors who have been net buyers of Indian debt this year. Markets are watching to see if the RBI’s signals lead to action or serve only as a warning.
