Indian bonds may keep sliding as RBI minutes point to further rate hikes

what happened

Indian government bonds are expected to weaken further in early trade on Thursday, after minutes of the central bank's latest policy meeting signalled that some members of the rate-setting panel think additional increases may be required to rein in inflation. The benchmark 6.94% 2036 bond closed the previous session at a yield of 7.4427%. A trader at a primary dealer expects it to trade in a band of roughly 7.40% to 7.47% early on.

Earlier this month the Reserve Bank of India lifted its repo rate by 25 basis points to 5.50%, its first hike in almost four years, and changed its stance from neutral to "calibrated tightening." Markets are now pricing in a little over 100 basis points of tightening over the next 12 months. Analysts at Yes Bank see a base case of another 50 basis points, split into 25-point moves in December and February.

Brent crude has stayed above $110 a barrel as Houthi attacks on Saudi Arabia intensified, and Washington has ordered some staff and dependants out of its diplomatic missions there. India imports close to 90% of its oil, so higher energy prices feed quickly into inflation, the rupee and public finances. Overnight index swap rates also moved up: the one-year rose 6 basis points to 6.59%, the two-year 5 basis points to 6.66%, and the five-year settled at 6.84%.

why it matters

For markets, rising rate expectations mean Indian sovereign yields and swap rates are reacting to both central bank signals and oil prices. Expensive crude adds to inflation risk, so traders will watch the RBI's December and February decisions closely.

market impact

Indian govt bonds, INR and OIS swaps: expected rate hikes push yields up; costlier oil adds inflation pressure

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instruments