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India Bonds Stable Ahead of RBI Rate Hike
6 Oct
Summary
- Benchmark bond yield settled lower, indicating cautious sentiment.
- Economists predict a 25 basis point rate hike by the RBI.
- Concerns linger over additional policy actions accompanying rate increase.
Indian government bonds traded with little fluctuation on Tuesday, as market participants braced for an anticipated monetary policy decision from the Reserve Bank of India. The benchmark 6.94% 2036 bond yield closed at 7.1928%, a marginal decrease from the previous day's close. This period has seen a consistent rise in the benchmark yield over seven consecutive weeks, accumulating a total of 45 basis points. This cautious sentiment is driven by expectations of a hawkish monetary policy announcement.
Approximately 60% of economists surveyed by Reuters foresee the Reserve Bank of India raising its key policy rate by 25 basis points. However, traders are not dismissing the possibility of further interventions, such as additional debt sales or a modest increase in banks' cash reserve ratio (CRR). Murthy Nagarajan, head of fixed income at Tata Asset Management, noted that the market has already priced in a 25 basis point repo rate hike and a temporary 50 basis point CRR hike for the current cycle.
Investors are also keenly observing the RBI's strategies for managing surplus liquidity in the banking system. This follows a significant bond sale by the RBI in September, where it divested bonds worth 1 trillion rupees, marking its largest sale for any financial year in over a decade. Meanwhile, India's overnight indexed swap (OIS) rates experienced a slight easing after a recent period of increase. The one-year OIS rate concluded 2.5 basis points lower at 6.2375%, the two-year rate fell 4.5 basis points to 6.41%, and the five-year rate settled 2.5 basis points lower at 6.67%.
