India bonds slip as traders wait for hawkish central bank action

Indian government bonds fell in early deals on Tuesday as investors braced for hawkish central bank monetary policy, with traders fearing additional policy actions.

The benchmark 6.94% 2036 bond yield was at 7.2213% at 10:10 a.m. IST, after ending at 7.2108% on Monday.

The yield has risen in each of the last seven weeks, gaining a cumulative of 45 basis points, its longest such streak in over a year.


A Reuters poll showed that nearly 60% of economists expect the RBI to raise its key policy rate by 25 basis points.

While a quarter-point increase appeared to be the market's base case, traders said the reaction in government bonds would rely more heavily on the RBI's forecast on the future pace of tightening, inflation risks and the durability of domestic growth.

DBS expects the central bank to hike repo rate, while a change in stance from withdrawal of accommodation from neutral in October or December will also underscore the hawkish intent.

"The key question for markets is whether the hike is a recalibration following last year's cuts or marks the start of a longer hike cycle."

Market positioning suggests that much of the anticipated tightening has already been reflected in bond prices.

Investors will closely watch for further measures aimed at absorbing surplus banking-system liquidity, through a hike in banks' cash reserve ratio or another round of debt sale.

The RBI sold bonds worth 1 trillion rupees ($10.4 billion) in September, its largest sale for any financial year in over a decade.

Rates

India's overnight indexed swap (OIS) rates inched upwards, with the shape of the swap curve indicating that markets expect policy rates to rise further over time.

The one-year OIS rate was at 6.2650%, while the two-year rate was at 6.46%. The liquid five-year rate was at 6.71%.