Indian bonds face pressure as RBI steps and debt supply rise

what happened

According to Newsmetry API, Indian government securities may remain in a tight range on Tuesday, with prices biased lower. Investors are weighing the central bank’s liquidity and foreign-exchange measures, while expensive oil and a large borrowing calendar could limit demand.

A private-bank trader expects the benchmark 6.94% 2036 bond (IN069436G=CC) to yield between 7.35% and 7.40%. The security ended Monday at 7.3857%, its highest level in three years, after recording its largest one-day increase in six months.

The Reserve Bank of India’s latest actions have made the outlook for banking-system liquidity and banks’ treasury operations less clear. Market participants also question whether the steps can give the currency durable support, adding to expectations of more rate increases. December hike bets strengthened after September consumer inflation rose to 5.54%, above the 5.40% median forecast in a Reuters poll, while Brent remained above $100 a barrel. Nomura expects year-on-year inflation to average 6.1% in the October-December quarter before slowing through 2027. “We expect a 25-basis-point hike in December, and a pause in 2027. Focus has shifted to currency defence.”

US CPI figures due Wednesday could offer the next signal on the Federal Reserve’s policy path and, indirectly, expectations for RBI rates. Later on Tuesday, the RBI is scheduled to sell 250 billion rupees ($2.61 billion) through open-market operations, while States will auction 312 billion rupees of debt. Traders are concerned that more liquidity-draining operations may follow. The 7.40% mark is expected to be an important hurdle for the 10-year yield, although uncertainty around RBI operations could drive it higher. In overnight indexed swaps, the one-year rate climbed 11.75 bps to 6.36%, the two-year rate added 11.25 bps to 6.55%, and the five-year rate rose 7.5 bps to 6.7975%. ($1 = 95.7700 Indian rupees)

why it matters

Higher rate expectations, liquidity absorption by the RBI and sizeable government borrowing are keeping pressure on Indian bond prices while increasing sensitivity across rates and currency markets.

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