India bond yields hit two-month high as rate hike fears intensify

India's 10-year benchmark bond yield reached a two-month high of 6.88% on Friday, before settling at 6.85% at the close. This surge in yields was attributed to increased caution amid fears of a potential policy rate hike and the ongoing escalation of the West Asia conflict. Traders began to factor in the possibility of rate tightening in the third quarter following the unexpectedly hawkish minutes from the latest monetary policy review.

The yield increased by nearly 10 basis points during the week, marking the highest weekly rise in this fiscal year. Despite the overall dovish tone of the monetary policy, it shifted to a more hawkish stance after the minutes revealed the possibility of a rate increase in December. The global geopolitical tensions also contributed to the negative sentiment in the markets.

Karur Vysya Bank’s treasury head, VRC Reddy, explained that domestic yields rose from the 6.75% lows seen before the RBI's decision to advance the FCNR-B deadline to August 31, shifting market focus from FCNR-driven liquidity optimism to inflation and rate risk concerns. The MPC minutes were perceived as more hawkish than the actual policy outcome, keeping the debate over potential rate hikes alive.

Reddy noted that the FCNR liquidity boost is already largely priced in, especially at the long end of the curve.