India bonds may weaken mildly after RBI hike; 10-year yield seen near 7.25%

MUMBAI: Indian government bonds may continue to weaken in early deals on Thursday, a day after the central bank raised interest rates for the first time in nearly four years and shifted its stance to suggest that more hikes were likely.

The benchmark 6.94% 2036 bond yield may trade in a 7.21%-7.25% band, a trader with a primary dealership said, after ending at 7.2410% on Wednesday.

Bond yields rise when prices fall.

“Unless there is a fresh open market sale announcement, the 10-year benchmark should hold around 7.25% level,” the trader said.

The Reserve Bank of India raised its key interest rate by 25 basis points to 5.50%, while shifting its stance to “calibrated tightening” from “neutral”.

It also raised its inflation forecast by 20 bps to 5.2%, while core inflation, which excludes volatile food and fuel prices, was seen at 4.4% from 4.3% earlier.

At a press conference, RBI Governor Sanjay Malhotra said the change in stance signalled a “milder form of tightening,” which is more data-dependent than pre-determined.

“The RBI is normalising rates to keep real rates positive rather than materially tightening financial conditions, and with close to 100 bps of hikes already priced in, most of the adjustment in yields is behind us,” said Anurag Mittal, president and head of fixed income at UTI AMC.

Contrary to market expectations, the central bank refrained from announcing additional measures to drain surplus liquidity from the banking system, which was taken as slightly positive and supportive of bonds.

In September, the RBI sold bonds worth 1 trillion rupees ($10.35 billion), the largest in at least a decade.