Indian government bonds face selling pressure after RBI policy minutes signal potential rate hikes

Indian government bonds are likely to come under strong selling pressure in early deals on Thursday following the release of the Reserve Bank of India’s latest monetary policy meeting minutes. Although the monetary panel voted unanimously to keep the policy repo rate unchanged at 5.25 percent on August 5 and retained a neutral stance, the meeting minutes signalled the possibility of future rate hikes.

Market participants expect the yield on the benchmark 6.94 percent 2036 bond to trade between 6.80 percent and 6.85 percent, following a previous close of 6.8170 percent on Wednesday. A private bank trader noted that a gap-up opening on the 10-year benchmark bond yield is realistic, with market participants watching closely to see if yields cross the key psychological level of 6.85 percent sustainably.

Sentiment has also weakened due to the central bank advancing the closure of its discounted swap facility for diaspora deposits. Additionally, India's overnight indexed swap rates are expected to jump with paying pressure across the curve. The one-year swap rate previously ended at 5.8075 percent, the two-year rate closed at 6.0475 percent, and the liquid five-year rate settled higher at 6.3975 percent.

During the policy discussions, RBI officials pointed to shifting inflationary pressures. RBI chief Sanjay Malhotra noted that while there are limited signs of generalised inflation so far, headline inflation appears to be normalising from previously benign levels. India's headline consumer inflation stood at 4.45 percent for July, which remains within the central bank's 2 to 6 percent tolerance band, alongside a medium-term target of 4 percent.

However, Reserve Bank of India Deputy Gupta stated that the scope for further policy easing does not exist, adding that a case for a rate hike may emerge during the course of the fiscal year.

Global factors are also influencing domestic expectations. The benchmark Brent crude contract has stayed around $92 per barrel amid a deadlock between the US and Iran. As the world's third-largest oil importer, higher crude prices pose risks to India's inflation trajectory, the rupee, as well as current account and fiscal metrics. These price movements have stoked inflation worries, prompting markets to price in an increase in borrowing costs.

"The signals from the Reserve Bank of India minutes reflect a cautious approach toward evolving macroeconomic conditions, particularly with global crude oil prices remaining elevated near $92 per barrel. For businesses and financial markets, this shift suggests that liquidity and borrowing costs may tighten in the coming months. Startups and enterprises must factor in potential interest rate upward movements while managing their working capital and financial planning for the fiscal year." — Dr. Shishir Gupta, Founder & CEO, StartupLanes