India bonds extend weekly slide; struggle to shake off RBI hike, hawkish stance shift

Indian government bonds continued their weekly decline as the central bank's hawkish shift and elevated oil prices dampened investor enthusiasm, driving the benchmark 10-year yield upward. The benchmark 6.94% 2036 bond closed at 7.2994% on Friday, up from the previous day's 7.2868%. Over the past seven weeks, yields have risen by 9 basis points, totaling a 45-basis-point increase since August 17.

The Reserve Bank of India (RBI) increased its repo rate by 25 basis points to 5.50% this week and adopted a "calibrated tightening" policy stance, hinting at potential further rate hikes. Lavanya Venkateswaran, a senior ASEAN and India economist at OCBC Bank, stated that the shift aligns with their expectations, with a forecast of an additional 25 basis point hike through March 2027, with a higher likelihood of additional hikes.

Most economists now anticipate India's terminal repo rate to approach at least 6.00%, while Standard Chartered Bank and Goldman Sachs project it at 6.25%. Rising oil prices, with Brent crude surpassing $105 a barrel this week amid escalating attacks on vessels, pose risks to India's energy-dependent economy, potentially straining government finances and accelerating headline inflation beyond the direct impact of fuel costs.

Overnight indexed swap rates remained roughly steady throughout the week, as easing U.S. yields mitigated the impact of the RBI's policy stance adjustment. The one-year OIS rate concluded at 6.24%, the two-year at 6.44%, and the liquid five-year rate settled at 6.7250%.