Indian bonds seen declining as Fed hike could pressure RBI to mirror move

MUMBAI: Indian government bonds were poised to drop on Thursday, as the US Federal Reserve raised interest rates for the first time since July 2023. This move could compel the domestic central bank to follow suit in its fight against rising inflation. The benchmark 6.94% 2036 bond yield was projected to fluctuate between 7.05% and 7.10%, according to a trader with a primary dealership, after closing lower at 7.0524% on Wednesday.

"There are fewer grounds to assume that the Reserve Bank of India will refrain from raising rates next month, and a trial of earlier levels is anticipated," the trader noted. US Treasury yields surged on Wednesday, with the 10-year yield surpassing 5% and the 2-year yield nearing 4.75%. This development followed the Fed's decision to increase interest rates and hint at additional hikes later in the year to curb inflation; the decision marked the central bank's inaugural move of this nature in over three years.

The Fed's 16 out of 18 policymakers projected at least one more quarter-percentage-point increase by the year's end. Fed Chair Kevin Warsh did not provide a rate projection. Market expectations of a rate hike at the Fed's subsequent meeting in late October stood at around 50%. In India, investor confidence continues to wane ahead of the RBI's scheduled open market sale of debt, with the initial tranche slated for later in the day.

The RBI will auction bonds worth 1 trillion rupees ($10.42 billion) this week, including 500 billion rupees on Thursday. Analysts bolstered their bets on an October hike after annual CPI inflation surged to 4.82% in August from 4.45% in July. Citi and Deutsche Bank have advanced their rate-hike prediction to October.