Indian bonds steady as RBI rate hike expectations strengthen

Mumbai: Indian government bonds remained largely unchanged Tuesday as traders anticipated further liquidity removal prior to the Reserve Bank of India's monetary policy decision next month, which is anticipated to include a rate hike. The yield on the benchmark 6.94% bond maturing in 2036 rose to 7.0516% by 10:30 a.m. IST, up from 7.0497% the previous day. A state bank trader said, "We are not expecting any major trend or pick-up in volume, and the market should move sideways today."

The easing of oil prices on Monday, despite Brent crude futures in Asian trade inching higher, prompted market monitoring of US-Iran tensions ahead of the upcoming United Nations meeting. The heightened geopolitical risk premiums in crude prices persisted even as President Donald Trump indicated a willingness to engage with his Iranian counterpart.

For India, which relies heavily on imports for its energy needs, stronger crude prices pose a significant macroeconomic risk. Increased oil costs elevate import expenses, erode the current account deficit, and can complicate the inflation outlook, straining government finances.

Strengthened expectations of a rate hike by the RBI at its upcoming monetary policy meeting on October 7 were fueled by a sharp acceleration in retail inflation to 4.82% in August. The US Federal Reserve's recent 25-basis-point rate increase, the first since 2023, further reinforced the notion that global monetary conditions might remain tight for an extended period.

Liquidity conditions had already tightened following the RBI's sale of 750 billion rupees ($7.83 billion) of bonds through open market operations, with an additional 250 billion rupees of securities set to be sold on Monday.