India Government Bond 5Y

The Reserve Bank of India, or RBI, unanimously decided to raise the repurchase rate, its policy rate, by 0.25% to 5.50% at its October 7 meeting, the first increase in nearly four years and in line with analysts' expectations. RBI Governor Sanjay Malhotra said in a statement after the meeting that the central bank's policy committee had considered data clearly indicating that inflation and the inflation outlook were not at the low levels of last year, making it necessary to adjust the policy rate. Malhotra also said that a rate cut would not be on the agenda in the near term, and that policy going forward could only involve raising rates or holding them steady. The RBI is moving in step with other Asian central banks, from the Bank of Korea to the Philippine central bank, to curb inflation after oil prices surged above 100 dollars a barrel amid tensions in the Middle East. Meanwhile, the yield on India's 10-year government bond jumped to its highest level since December 2023 after the rate hike decision.

The Indian Rupee opened marginally higher against the US Dollar at the start of the Reserve Bank of India's monetary policy week, with USD/INR ticking down to near 96.25 as traders trimmed hawkish Federal Reserve rate expectations. According to the CME FedWatch tool, the odds of the Fed leaving interest rates unchanged at this month's policy meeting have risen to 82.3% from 35.8% seen last week, after US Nonfarm Payrolls for September showed the economy created just 29K fresh jobs, below 90K estimates and a previous reading of 133K revised lower from 162K, while the Unemployment Rate rose to 4.2% and Average Hourly Earnings grew 3% year-on-year. Despite the cooler Fed bets, the US Dollar Index posted a fresh yearly high near 102.53 and 10-year US Treasury Yields held around 5.27%, not far from last week's two-decade high of 5.34%. The major trigger for the Rupee this week is the RBI's monetary policy announcement on Wednesday, with analysts at MUFG/BTMU officially forecasting the central bank to keep rates on hold while calling for a hiking cycle to begin from December, seeing a good chance the RBI moves its stance away from neutral to signal a tightening bias. MUFG/BTMU forecast 50bps of rate hikes this cycle with some risk of 75bps in total, citing strong growth, abundant liquidity, picking-up credit growth, supportive fiscal policy, and upside inflation risk from higher commodity prices and adverse weather conditions in India.

The Reserve Bank of India announced a plan to sell 1 trillion rupees of government bonds, or about 10.5 billion dollars, to drain excess liquidity from the banking system. It is the RBI's most aggressive measure to date, sending Indian government bonds lower and yields higher. The bond with a 6.94% coupon maturing in 2036 rose 7 basis points to 7.09%, while the bond with a 6.36% coupon maturing in 2031 jumped 16 basis points to 6.78%, after Indian markets reopened on Tuesday. The bond sale will be conducted in three rounds, with the first set for September 17, when the central bank will sell bonds with about 3 to 6 years of remaining maturity. Pressure is also building from the Indian central government's borrowing plan through nearly 8 trillion rupees of bond issuance over the next six months, compounded by high oil prices and August inflation that moved closer to the upper end of the 2-6% target range. Citigroup expects the RBI may raise interest rates by a total of 50 to 75 basis points, with the hiking cycle possibly beginning as early as next month. VRC Reddy, head of treasury at Karur Vysya Bank, said 5-year bonds have been particularly hard hit and expects India's yield curve to steepen, with the spread between 5-year and 10-year bond yields likely holding at around 20 to 30 basis points.

Minutes of the Reserve Bank of India's monetary policy committee meeting held on the 5th of this month show that several members hinted at the possibility of raising interest rates going forward. The committee kept the benchmark repo rate unchanged at 5.25 percent and maintained a neutral policy stance, but indicated it was watching for signs that supply-driven inflation may be spreading across the broader economy. Governor Malhotra said vigilance must not be relaxed because the risk of food and fuel price increases causing a broader rise in inflation persists, and monetary tightening may be needed if signs of those risks materialising emerge. Deputy Governor Gupta said there is no room for further monetary easing, and that grounds for a rate hike could in fact emerge during fiscal 2026. External member Ram Singh also expressed the view that policy should be adjusted quickly to protect macroeconomic stability if external shocks worsen.