India bonds slump on Fed rate hike bets, benchmark trades at discount

Mumbai witnessed a decline in Indian government bonds on Monday, with the benchmark paper trading at a discount. This slump occurred due to hawkish remarks from the US central bank chief, which heightened the anticipation of an interest rate hike next month. Additionally, oil prices surged above $90 a barrel, further exacerbating the situation.

As a result, the yield on the benchmark 6.94% 2036 bond decreased to 6.9480% by 10:45 a.m. IST, down from 6.9108% on Friday. The yield reached a peak of 6.9538% earlier in the session, marking its highest level since June 11. The inverse relationship between bond prices and yields was evident as investors grew increasingly bearish.

A trader from a state-run bank explained that sentiment had turned distinctly bearish due to a more hawkish Federal Reserve, rising crude prices, and the Reserve Bank of India's willingness to act on inflation. The possibility of a rate hike in September rose to 60%, up from 35% prior to the comments. With India being an oil-importing nation, a sustained increase in crude prices could worsen inflationary pressures and impact government finances.

The Reserve Bank of India's minutes from their August meeting revealed that policymakers remained prepared to raise interest rates if upside inflation risks emerged.