India's ultra-short-term borrowing costs spike

Mumbai: Indian government borrowing costs for ultra-short-term bonds surged at a recent auction, hitting a four-year high as investors anticipated stricter monetary policy. The Reserve Bank of India increased rates for the first time in nearly four years last week, signaling more rate hikes, while Governor Sanjay Malhotra emphasized that monetary policy is intertwined with financial stability.

The government sold 182-day and 364-day treasury bills with yields of 6.29% and 6.49%, respectively, their highest levels in about 18 months. These yields rose more than 20 basis points compared to the previous week, surpassing 79 bps and 99 bps for the six-month and one-year notes, respectively. This premium, or spread over the 5.5% repo rate, is the highest in over 18 months.

VRC Reddy, treasury head at Karur Vysya Bank, suggested that the hawkish policy guidance and latest commentary have raised expectations for terminal rate hikes due to resilient growth and rising inflation. Mandar Pitale, head of treasury at SBM Bank (India), expects another 50 basis points in rate hikes this fiscal year, warning that higher oil prices could lead to persistently higher inflation beyond the RBI's comfort zone, potentially compelling the central bank to hike rates even in FY28.