RBI's surprisingly hawkish tone in policy minutes weighs on Indian bonds

Early Thursday, Indian government bonds experienced significant selling pressure following minutes released from the Reserve Bank of India's recent policy meeting, suggesting the central bank may raise rates if inflation risks materialize. The yield on the benchmark 6.94% 2036 bond slipped to 6.8382% by 10:25 a.m. IST, down from 6.8170% the previous day.

Policymakers at the meeting appeared more cautious about inflation, according to the minutes. RBI Governor Sanjay Malhotra noted that while price pressures have not yet broadened significantly across the economy, headline inflation is beginning to increase from the unusually low levels observed earlier. STCI Primary Dealer maintained its stance that no rate hikes should occur over the next two policy meetings, but indicated a higher probability of a rate increase at the December meeting.

Retail inflation reached 4.45% in July, remaining within the RBI's 2%-6% tolerance range, although it surpassed its medium-term target of 4%. Deputy Governor Poonam Gupta expressed limited room for further monetary easing, adding that the case for a rate increase may arise later in the fiscal year, depending on evolving conditions.

Inflation concerns have been compounded by elevated oil prices. Brent crude hovered near $92 a barrel as tensions between the United States and Iran remained unresolved, prompting markets to price in the potential for higher interest rates. This surge in crude prices poses multiple risks for India, the world's third-largest oil importer. It could exert pressure on the rupee, exacerbate inflation, and strain both the current account and government finances.