Aggressive RBI measures hand India bonds a ninth weekly loss
MUMBAI: Indian government bonds nursed losses for a ninth straight week, battered by the Reserve Bank of India’s rupee defence, which has sharpened its tightening bias, clouded the policy outlook and sapped demand for debt. The benchmark 6.94% 2036 bond yield rose around8 basis points this week to 7.3789%, extending its nine-week climb to over 62 bps. The RBI doubled down on rupee support this…
Indian government bonds experienced their ninth consecutive weekly decline, as the Reserve Bank of India (RBI) implemented aggressive measures to defend the rupee and tighten monetary policy. The benchmark 6.94% 2036 bond yield rose by 8 basis points to 7.3789% this week, further extending its nine-week climb to above 62 basis points. The RBI's increased support for the rupee, coupled with efforts to reduce excess liquidity through open-market sales, dampened bond market sentiment.
Inflation concerns and the RBI's efforts to curb the rupee's depreciation have heightened expectations of a larger rate hike in December, resulting in a rise in short-end yields and swap rates. RBI Governor recently stated that while the central bank does not typically use monetary policy to protect financial stability, the two objectives are closely intertwined.
Nomura noted that the RBI's comments indicate that inflation is no longer the sole determinant of monetary policy decisions, and further measures against speculation and managing foreign exchange flows are possible if global conditions remain challenging.
The central bank is anticipated to tighten financial conditions further to curb capital outflows and increase the cost of shorting the rupee. Traders speculate that the RBI might tolerate higher bond yields to maintain the spread over US rates. The premium on India's 10-year yield over the US counterpart widened to 227 basis points this week, from 206 basis points a week earlier.
The market faces additional pressure from duration-heavy central and state borrowing timetables. A weakening US Treasury yield curve provided some relief, with the 10-year yield down 13 basis points this week to 5.11%, on track for its best week since the Iran war started in February. The Indian overnight indexed swap curve flattened significantly, with the 1-year rate posting its largest weekly increase this fiscal year.
The 1-year OIS increased by 32 basis points to 6.56%, the 2-year surged by 18 basis points to 6.6225%, and the 5-year rose by 6 basis points to 6.7875%.
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