Global bond rout hoists benchmark Indian yield to mid-2024 high before RBI policy

A selloff in Indian government bonds deepened on Thursday, as a surge in global yields and rising inflationary pressures cemented expectations of a rate hike by the central bank next week.

Local bonds tracked a rise in global yields, including the 10-year US Treasury yield briefly topping a 24-year peak. It was last at 5.30%, bringing the spread between it and the Indian benchmark to the tightest in more than a year.

The Indian benchmark 10-year yield rose 3 bps to 7.2133% on Thursday, the highest since April 2024. It rose nearly 10 bps this week, its worst since mid-August.


India's debt market will be shut Friday for a local holiday, while the Reserve Bank of India is expected to deliver its first rate hike in nearly four years at its policy decision on October 7.

That comes with a backdrop of inflation picking up, rising rates globally and relatively loose domestic monetary conditions, partly due to surplus liquidity from one-off policy driven FX flows.

"RBI may have to considerably tighten monetary policy in the months ahead, with next week's meeting being live, and deploy measures to absorb excess liquidity," said Sreejith Balasubramanian, senior economist at Bandhan Mutual Fund.

SUPPLY PRESSURES PERSIST

Bonds were also battered by supply fears after New Delhi raised the issuance of long-term bonds in its borrowing plan for the second half of the fiscal year and the central bank sold the most bonds through open market operations in a decade to narrow a record cash surplus.

Traders are also bracing for a deluge of state government debt, with the market expecting 3.25-3.5 trillion of bond issues between October-December.

To tamp down on excess liquidity in the banking system, traders are worried RBI may announce more open market sales at next week's policy.

"OMO sales is a hanging sword, which will continue to keep pressure on yields," a private-bank trader said.

RATES

India's overnight indexed swaps surged, tracking global yields.

The one-year overnight indexed swap rate rose 6.75 bps to 6.2650%, two-year rate jumped 7.5 bps to 6.48% while the 5-year added 8.25bps to 6.73%.