Fresh debt sale set to rattle Indian bonds as rate-hike jitters persist
The benchmark 6.94% 2036 bond yield may trade between 7.38% and 7.42%, according to a trader at a primary dealership, after closing at 7.3921% in the previous session
Indian government bonds may experience selling pressure ahead of the weekly auction on Friday, exacerbating concerns surrounding the Reserve Bank of India's interest-rate outlook. The benchmark 6.94% 2036 bond yield could trade between 7.38% and 7.42% after closing at 7.3921% in the previous session. New Delhi plans to sell ₹34,000 crore ($3.58 billion) of the benchmark paper later in the day, increasing the total issuance size of the security to ₹2.38 lakh crore.
The market is under heavy bearish pressure, and the cutoff yield may rise to above 7.40% levels, according to a trader. India's September consumer inflation accelerated to 5.54%, potentially exceeding the 6% upper limit of the central bank's tolerance band in October, as per most economists. Reserve Bank of India Governor Sanjay Malhotra hinted in a media interview that while the central bank does not typically use monetary policy to safeguard financial stability, the two are closely intertwined.
The RBI's heightened focus on currency stability, combined with elevated inflation, has fueled expectations of a larger-sized December rate hike, leading to increased bets on higher short-term bond yields and overnight indexed swap rates. Additionally, the central bank's tighter rules on daily maintenance of the cash reserve ratio, set to begin on Friday, could put extra pressure on the shorter end of the bond market.
Such developments may intensify pressure on India's overnight indexed swap (OIS) rates, with the one-year OIS rate rising to 6.5450% from 6.5450% and the two-year rate increasing to 6.64% from 6.64% in recent sessions.
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