RBI liquidity measures may pressure India bonds; rupee rally to limit losses

Mumbai: Indian government bonds may experience mild selling pressure at the beginning of the week following the central bank's announcement of measures to absorb liquidity in the banking system. However, expectations of a sharp rise in the rupee could help curb potential losses. Analysts predict the benchmark 6.94% 2036 bond yield could trade within a 7.26%-7.32% range, according to a trader at a primary dealership.

The yield increased from 7.2994% on Friday. The Reserve Bank of India (RBI) introduced fresh measures to bolster the rupee, redirecting oil companies' dollar purchases away from the spot market and tightening hedging rules as the currency nears record lows. The trader believes that the RBI's interventions might prevent the 10-year benchmark from reaching over 7.30%.

The RBI plans to sell debt worth 250 billion rupees ($2.58 billion) on Tuesday, and tightened rules for daily reserve maintenance for banks starting October 16. These moves come shortly after the central bank increased its policy rate and signaled more rate hikes in the coming months. Additionally, the central bank raised its inflation forecast by 20 basis points to 5.2%, while core inflation (excluding volatile food and fuel prices) stood at 4.4% from 4.3% earlier.

India's retail inflation figures for September are expected later in the day, with a Reuters poll suggesting a rise of 5.4% year-on-year. Meanwhile, the benchmark Brent crude price remains near the $105 per barrel mark. High energy prices could affect India's inflation trajectory and government finances, as the country remains reliant on oil imports.