Indian Government Bonds Face Further Weakness Following RBI Policy Minutes

Indian government bonds are expected to weaken further in early trading sessions, following the release of minutes from the latest monetary policy meeting. Members of the rate-setting panel indicated that further interest rate hikes may be necessary to curb inflation.

The benchmark 6.94 per cent 2036 bond yield is projected to trade between 7.40 per cent and 7.47 per cent, according to a trader at a primary dealership. This follows a previous session close of 7.4427 per cent. Meanwhile, overnight indexed swap (OIS) rates are expected to trend higher in line with bond yields and oil prices.

Earlier this month, the Reserve Bank of India’s Monetary Policy Committee raised the repo rate by 25 basis points to 5.50 per cent, marking its first hike in nearly four years. The central bank also shifted its policy stance from 'neutral' to 'calibrated tightening', signaling the likelihood of subsequent rate increases.

Market participants have priced in a little over 100 basis points of hikes over the next 12 months. This adjustment comes as a sharp rise in oil prices, fueled by conflict in the Middle East, combines with a deficient monsoon season to drive up food prices and stoke broader inflation worries.

Analysts at Yes Bank noted that with oil exhibiting an upside bias and generalisation of inflation pressures evident in the September inflation print, the central bank may continue its tightening cycle. Their base case projects an incremental 50 basis points increase in policy rates, split evenly between 25 basis points adjustments in December and February.

Global energy markets remain elevated, with the benchmark Brent crude contract staying above $110 per barrel. Ongoing security concerns in the Middle East, including attacks by the Houthis on Saudi Arabia and subsequent U.S. diplomatic drawdowns, continue to support high oil prices.

India remains particularly vulnerable to elevated energy prices because the country imports nearly 90 per cent of its total requirements. Consistently high prices pose risks to the nation’s inflation trajectory, the rupee, and government finances.

In the swap market on Wednesday, the 1-year OIS ended 6 basis points higher at 6.59 per cent, the 2-year rate rose 5 basis points to 6.66 per cent, and the 5-year rate settled at 6.84 per cent.

"The recent signal from the Reserve Bank of India regarding calibrated tightening highlights the persistent macroeconomic challenges posed by inflation and global energy prices. For businesses and entrepreneurs, a rising interest rate environment means higher costs of capital and debt servicing. Companies must closely monitor their financial planning, working capital management, and cash flow forecasts as borrowing costs adjust to broader monetary policy shifts." — Dr. Shishir Gupta, Founder & CEO, StartupLanes