India 10-Year Bond Yield Rises To 7.25% After RBI Repo Rate Hike

India's 10-year government bond yield surged to 7.25% on Wednesday following the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) decision to raise the repo rate by 25 basis points to 5.50%. The MPC indicated a calibrated tightening of monetary policy, signaling that near-term rate cuts were not in the cards. Instead, future policy actions would depend on inflation and growth trends.

RBI Governor Sanjay Malhotra warned that near-term inflation risks were no longer as manageable as they had been the previous year. He projected near-term inflation to average nearly 5.8% over the next three quarters, with core inflation at 4.4% for the fiscal year 2027. The RBI subsequently raised its inflation forecast for FY27 to 5.2%, with inflation expected to ease to 5.6% in the first quarter of FY28.

Inflation risks were attributed to deficient monsoon conditions, El Niño, and volatile international oil prices. The central bank also highlighted early signs of price pressures across the CPI basket. On the external front, India's current account deficit (CAD) remained modest at 0.5% of GDP or $4.2 billion in Q1 FY27, though the merchandise trade deficit widened in July-August due to higher crude oil and electronic goods imports.

Despite these challenges, strong services exports, remittances, and bilateral trade agreements were expected to bolster the CAD. The RBI remains optimistic about a healthy balance of payments surplus in FY27, backed by substantial foreign exchange reserves covering around 11 months of imports.