India’s 10-year government bond yield climbed to its highest level since March 2023 as hawkish signals from the RBI, rising inflation and rupee pressure fuelled bets on another rate increase.
Indian government bonds fell further on Wednesday, pushing the benchmark 10-year yield to its highest level since March 2023 as traders reacted to a more hawkish tone from the Reserve Bank of India and fresh concern over inflation. The 6.94% 2036 bond ended 3.5 basis points higher at 7.3999%, according to market data, after investors trimmed positions in anticipation that borrowing costs may need to rise again.
Pressure intensified after RBI Governor Sanjay Malhotra said in a media interview on Tuesday that the central bank does not usually rely on monetary policy to protect financial stability, although the two issues cannot be fully separated. Business Standard reported that Malhotra also argued that price stability cannot be achieved without financial stability, because a sound financial system is necessary for monetary policy to work effectively. Those remarks came as the rupee has faced renewed strain in recent weeks.
The sell-off also reflected unease over the RBI’s efforts to steady the currency. Over the past week, the central bank has introduced measures including routing oil companies’ dollar purchases through a special facility and requiring cash margins on foreign-exchange hedges. Traders have interpreted those steps as shifting some of the defence of the rupee on to the bond market, particularly by widening the gap between Indian and US yields. Market participants are now increasingly pricing in the possibility of a rate increase at the RBI’s December policy meeting.
Inflation data added to that view. India’s annual wholesale inflation rose 11.39% in September, faster than expected, while retail inflation climbed to 5.54% and was seen moving towards the RBI’s upper tolerance limit of 6% in October. Oil prices also strengthened, adding another layer of concern for an import-dependent economy. The central bank raised its repo rate last week for the first time in almost four years, and Payal V. Pandya of Bajaj Broking Prive told Reuters that if consumer inflation breaches the upper band in upcoming data, a December increase would become hard to avoid.
Swap markets echoed the shift in sentiment. One-year overnight indexed swap rates jumped 10.25 basis points to 6.4375%, while the two-year rate rose 8 basis points to 6.5950% and the five-year rate climbed 4.75 basis points to 6.7925%. Investors were also watching later US inflation figures for clues on the Federal Reserve’s next move, since that could influence the gap between American and Indian yields and shape demand for local debt.
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