India bonds slip as traders wait for hawkish central bank action

MUMBAI: Indian government bonds experienced a decline in early trading on Tuesday as traders anticipated hawkish central bank monetary policy, raising concerns about further policy actions. The benchmark 6.94% 2036 bond yield was recorded at 7.2213% at 10:10 a.m. IST, following a 7.2108% closing on Monday. The yield has increased across the past seven weeks, amassing a total of 45 basis points, the longest such stretch in over a year.

According to a Reuters poll, approximately 60% of economists anticipate the Reserve Bank of India (RBI) to raise its key policy rate by 25 basis points. Though a quarter-point increase was considered the market's standard scenario, traders indicated that the government bonds' reaction would primarily depend on the RBI's outlook regarding the pace of tightening, inflation risks, and the sustainability of domestic growth.

DBS expects the central bank to increase the repo rate, while a shift in stance from withdrawal of accommodation to neutrality in October or December would also indicate a hawkish approach. The central question for the markets is whether this hike represents a recalibration after last year's cuts or signifies the beginning of a prolonged hiking cycle.

Market positioning suggests that most of the expected tightening has already been incorporated into bond prices. Investors will closely monitor for additional measures aimed at absorbing excess liquidity in the banking system, such as a hike in banks' cash reserve ratio or another debt sale round. In September, the RBI sold bonds worth 1 trillion rupees ($10.4 billion), the largest sale for any financial year in over a decade.