India bonds seen boxed in narrow range, all eyes on RBI verdict

Indian government bonds are expected to remain stable at the opening bell on Tuesday, with market participants anticipating the central bank's first interest rate hike in nearly four years. The benchmark 6.94% 2036 bond yield is anticipated to trade within a narrow 7.19% to 7.24% range, following its recent surge. The yield has increased consecutively for seven weeks, accumulating a 45 basis point gain, the longest streak in over a year.

The Reserve Bank of India is anticipated to commence its rate-hiking cycle in October, though the hikes are likely to be modest, totaling 75 basis points by February 2027. This move aims to curb the real policy rate from turning negative as inflation continues to rise, according to IDFC First Bank. Nearly 60% of economists polled by Reuters expect a 25-basis-point rate increase.

Additionally, traders will closely monitor the RBI's forward guidance and any steps aimed at removing liquidity excess from the banking system. In September, the RBI sold bonds worth ₹1 lakh crore ($10.39 billion), the largest sale in at least a decade, and has been regularly conducting reverse repos to drain surplus cash from the system.

India's overnight indexed swap (OIS) rates are projected to stay within a range, with a rate hike already priced into the swaps. The one-year OIS rate stands at 6.2625%, while the two-year rate is at 6.4475%. The five-year liquid rate settled at 6.69%.