Indian bonds seen declining as Fed hike could pressure RBI to mirror move

MUMBAI: Indian government bonds are set to decline on Thursday, as the US Federal Reserve hiked interest rates for the first time since July 2023, which could pressure the domestic central bank to follow suit as it battles rising inflation.

The benchmark 6.94% 2036 bond yield is expected to trade between 7.05% and 7.10%, according to a trader with a primary dealership, after ending lower at 7.0524% on Wednesday.

“There are fewer reasons to believe that the Reserve Bank of India will not hike rates next month, and a test of levels seen earlier in the week is on the cards,” the trader said.

US Treasury yields ended higher on Wednesday, with the 10-year Treasury yield above 5% and the 2-year yield closing near 4.75%.

The move comes after the Fed raised interest rates and flagged further increases in borrowing costs next quarter to control inflation; the decision, the Fed’s first such move in over three years, was unanimous.

New policy projections showed 16 of 18 policymakers anticipate at least one more quarter-percentage-point hike by the end of this year.

Fed Chair Kevin Warsh did not submit a rate projection. Market bets on a rate hike at the Fed’s next meeting in late October held at roughly 50%, according to CME FedWatch.

Back home, investor sentiment continues to deteriorate ahead of the RBI’s planned open market sale of debt, with the first tranche taking place later in the day.

The RBI will sell bonds worth 1 trillion rupees ($10.42 billion) this fortnight, including 500 billion rupees on Thursday. Analysts hardened bets on an October hike after annual CPI inflation rose 4.82% in August from 4.45% in July.

Citi and Deutsche Bank have brought forward their rate-hike call to October.