Indian bonds sink as RBI plans ₹1 lakh crore sales to drain liquidity
2031 yield jumps 16 bps; Citi sees 50-75 bps of rate hikes starting in October amid oil and inflation risks
The Reserve Bank of India (RBI) announced plans to sell ₹1 lakh crore ($10.5 billion) worth of sovereign bonds to reduce liquidity in the banking system, which could lead to inflation risks. This move comes amid a year of record government borrowing and a global sell-off of Indian bonds, with yields on the 6.94 per cent bond due 2036 rising by 7 basis points to 7.09 per cent and those on the 6.36 per cent note due 2031 climbing 16 basis points to 6.78 per cent.
The additional supply of debt is exacerbating bond-market concerns as oil prices surge, contributing to inflation risks and increasing the likelihood of an RBI interest-rate hike in the following month. The central bank's decision to drain cash from lenders is the most stringent action it has taken so far, and experts anticipate the yield curve to steepen further, particularly in the five-year segment.
Citigroup Inc. projects that the RBI will raise borrowing costs by 50-75 basis points, indicating the beginning of a tightening cycle next month.
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