Bonds Slump in India as Hawkish RBI Minutes Fuel Rate-Hike Talk

  • Next move will likely be an interest-rate hike: Nomura report
  • Benchmark 10-year bond yield climbs to a seven-week high

Indian sovereign bonds slumped the most in Asia, with the 10-year yield rising to a seven-week high, as minutes of the central bank’s latest meeting signaled the possibility of an interest-rate hike.

Policy makers expressed concerns about inflationary pressures, with one of them even contemplating a pre-emptive rise in benchmark rates, minutes from the April 5-6 meeting of the six-member Reserve Bank of India panel showed late Thursday. That suggests the next move will likely be an increase, Nomura Holdings Inc. economists led by Sonal Varma wrote in a report.

The RBI panel unexpectedly raised the reverse repurchase rate earlier this month while keeping the main repo rate unchanged, effectively tightening policy by making overnight borrowings expensive. That followed February’s surprising change in the authority’s stance from accommodative to neutral as it signaled an end to the easing cycle that began in early 2015.

“The minutes support our view that hikes to the repo rate will come onto the agenda much sooner than generally expected,” Shilan Shah, Singapore-based economist at Capital Economics, wrote in a report. “The RBI has shifted toward tighter policy, even while ostensibly maintaining its neutral stance.”

The RBI’s steps have come as authorities seek to rein in liquidity after the government’s November recall of high-value currency notes flooded the banking system with cash. The surplus funds risk intensifying price pressures and imperiling the central bank’s 4 percent target set for the medium term. The next rate decision is on June 7.

  • Yield on 6.97% bonds due Sept. 2026, current 10-year benchmark, jumps 4bps to 6.92%, its highest close since March 1; rose to as high as 6.96% earlier
    • Rise in 10-year yield biggest among similar-maturity regional notes
    • Yield climbed 10bps in week
  • India’s government sold 150b rupees ($2.3b) of sovereign notes as planned at Friday’s auction
    • Primary dealers had rescued last week’s sale by buying unsold 2026 debt as tepid demand for the benchmark paper resulted in lukewarm bidding
  • NOTE: RBI raised reverse repo to 6% from 5.75% earlier this month, with benchmark repo rate steady at 6.25%, citing excess funds in the banking system
  • Rupee falls 0.1% to 64.6125/dollar Friday; down 0.3% over five days to cap second weekly decline
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