India bonds end volatile session lower as rate hike bets rise

MUMBAI: Indian bonds fell at the end of a volatile session on Thursday, after a media report that the central bank is weighing interest rate hikes to support the rupee raised bets of policy tightening, eclipsing softer oil prices and liquidity support measures.

The benchmark 6.48% 2035 bond yield settled 3.7 basis point higher at 7.1134%, after falling to 7.0194% earlier in the day. Bond prices move inversely to yields.

Bloomberg News reported on Thursday that the Reserve Bank of India is considering options to stabilize the rupee, including raising interest rates.

The rupee has shed about 6% since the start of the Middle East war, prompting the government to take measures to curb the slide, including increasing import duties on gold and silver.

The currency closed at 96.20 per dollar on Thursday, a day after hitting a record low of 96.96.

Economists at Standard Chartered said the RBI is likely to start raising interest rates as early as June on increasing inflation risks from elevated crude prices.

Brent futures rose more than 1% on Thursday, recovering some ground after an about 5.6% slide in the previous session.

Sentiment was also briefly supported by the RBI’s plan to conduct a three-year dollar/rupee buy/sell swap auction of $5 billion on May 26.

Focus is now on the central bank’s next dividend. While expected to be a record surplus transfer, a Reuters poll of economists suggested this windfall would not keep New Delhi from missing its fiscal deficit target.

Economists at HSBC forecast a current account deficit of 2.3% of GDP in FY27, up from 0.9% in FY26, and a balance-of-payments deficit of around $65 billion in FY27, compared with about $35 billion in FY26.

Rates

India’s overnight index swap rates surged as fears of rate hikes spurred paying.

The one-year swap rose 1.5 bps to 6.36%, while the two-year rate climbed 9 bps to 6.5550%. The five-year rate rose 5.25 bps to 6.85%.