India bonds pummelled after Treasury rout, traders raise rate hike bets

Mumbai: Indian government bonds experienced a sharp decline early on Thursday as US Treasury yields surged and oil prices rose, strengthening the likelihood of a hawkish stance from the local central bank at its upcoming monetary policy meeting. The benchmark 6.94% 2036 bond yield reached 7.0914% by 10:15 a.m. IST, up from 7.0447% on Wednesday, marking its highest level since September 15.

Bond yields typically move inversely to prices. US Treasury yields hit their highest levels since July 2007, following a strong purchasing managers’ report that reignited concerns about persistent inflation. Brent crude prices dipped in Asian trade on Thursday after Iran expressed openness to diplomacy to resolve the US-Iran conflict, but prices remained elevated after a nearly 4% increase the previous session.

India, which relies on imports for around 90% of its crude oil needs, is especially vulnerable to fluctuations in global oil prices, leading to concerns over inflation and expectations of a possible interest rate increase within the next two weeks. The anticipation of policy tightening has intensified since India's retail inflation hit 4.82% in August and the Federal Reserve raised rates by 25 basis points last week, the first such increase since 2023.

The Reserve Bank of India's monetary policy decision is scheduled for October 7, with many market participants anticipating a repo rate hike. DBS noted in a note that the Reserve Bank of India's mandate to combat inflation is likely fueling the push to reduce excess liquidity, increasing the probability of a rate hike at the October meeting.