Indian govt bonds plummet as US Treasury yields spike, traders raise RBI rate hike bets

Indian government bonds experienced a decline in early market deals on Thursday, aligning with a surge in US Treasury yields and higher oil prices. These factors have heightened expectations that India's central bank will take a more aggressive stance during its upcoming monetary policy meeting. The benchmark 6.94 per cent 2036 bond yield rose to 7.0914 per cent by 10:15 a.m. IST, up from 7.0447 per cent the previous day.

The yield peaked at 7.0994 per cent earlier in the session, marking the highest level since September 15.

US Treasury yields soared to their highest point since July 2007 on Wednesday, following a strong purchasing managers' report that reignited worries about persistent inflation. Brent crude prices decreased in Asian trade on Thursday as Iran expressed openness to diplomacy to end the US-Iran war, yet prices remained high due to a roughly 4 per cent increase from the prior session.

As India relies on imports for about 90 per cent of its crude oil requirements, fluctuations in global oil prices pose significant risks, contributing to inflation concerns and expectations of an interest rate increase within the next two weeks.

India's exposure to interest rate hikes has intensified following the August retail inflation, which stood at 4.82 per cent. Additionally, the Federal Reserve increased interest rates by 25 basis points last week, marking its first such move since 2023. With the Reserve Bank of India's monetary policy decision scheduled for October 7, many market observers anticipate a rate hike.

"The RBI's inflation mandate has likely spurred efforts to reduce excess liquidity, with the chances of a rate hike at the October meeting growing," DBS noted in a recent note. Overnight indexed swap rates mirrored the movement of bond yields in both India and the US, with one-year rates at 6.16 per cent, two-year rates reaching 6.38 per cent, and five-year rates surging to 6.64 per cent.