Indian bonds slip on higher oil, hawkish RBI governor comments

Indian government bonds experienced a decline in early trading on Wednesday due to a surge in oil prices and remarks from the central bank chief indicating a cautious stance. The 6.94% 2036 bond yield, which serves as a benchmark, reached 7.3886% at 9:45 a.m. IST, marking an increase from 7.3655% on Tuesday. When yields rise, bond prices fall.

The yield had previously surged to 7.4112%, the highest level since March 2023, and has risen by 20 basis points since the central bank's recent rate hike. Oil prices surged in Asian markets as traders responded to the geopolitical situation between Yemen's Iran-aligned Houthis and Saudi Arabia. The benchmark Brent crude contract was trading around $107 per barrel.

The rise in energy prices has a significant impact on oil-importing India, exacerbating inflation and putting pressure on the currency. Reserve Bank of India Governor Sanjay Malhotra, in an interview on Tuesday, stated that while the central bank usually does not use monetary policy to protect financial stability, these objectives are not entirely independent of each other.

This comment follows a series of measures taken by the central bank to bolster the local currency, some of which are anticipated to decrease liquidity surplus. Earlier this week, the RBI increased the key policy rate to 5.50% and adjusted its policy stance to a calibrated tightening, signaling potential further rate hikes. In September, India's consumer inflation surged to 5.54%, with the central bank anticipating a further increase in October.

If this trend continues, it may strengthen the case for additional rate hikes, according to HSBC. Traders are now eagerly anticipating the release of the United States' inflation data, which will provide insights into the Federal Reserve's interest rate direction following last month's rate hike.