India bond selloff to continue as RBI policy minutes hint at more rate hikes

Indian government bonds are expected to experience a decline in value during early trading on Thursday, as recently released minutes from the Reserve Bank of India's monetary policy meeting suggest that members of the rate-setting panel may require additional rate hikes to combat inflation. The benchmark yield for the 6.94% 2036 bond is projected to fluctuate between 7.40% and 7.47%, according to a trader from a primary dealership. This follows the bond's previous closing price of 7.4427% on the prior trading session.

Earlier this month, the Reserve Bank of India's Monetary Policy Committee increased the repo rate by 25 basis points to 5.50%, marking its first rate hike in nearly four years. The committee also altered its stance to "calibrated tightening" from "neutral," signaling potential further rate hikes in the future.

Inflation concerns have been exacerbated by a recent surge in oil prices attributed to the ongoing war in the Middle East and a deficient monsoon season, which has led to a rise in food prices. Consequently, markets have priced in approximately 100 basis points of additional hikes over the next year. Despite oil prices maintaining an upward trend, analysts at Yes Bank maintain that the Reserve Bank of India may continue tightening monetary policy, with a potential 50 basis points increase in policy rates – 25 basis points each for December and February.

The benchmark Brent crude contract has remained above $110 per barrel, as heightened attacks by the Houthis on Saudi Arabia have prompted the United States to order some diplomats and family members to evacuate their missions in the Kingdom. India is particularly susceptible to this energy price volatility, as the country imports around 90% of its energy requirements. Persistent high oil prices could exacerbate the nation's inflation trajectory, adversely affecting the rupee and government finances.