India bonds sink deeper on RBI commentary, inflation concerns

MUMBAI: Indian government bonds extended losses on Wednesday, driving the 10-year yield to its highest since March 2023, as hawkish remarks from the central bank chief and rising oil-led inflation concerns prompted tradersto further pare their positions.

The benchmark 6.94% 2036 bond surged 3.5 basis points to 7.3999%, a more-than-three-year high.

Sentiment soured after the Reserve Bank of India Governor Sanjay Malhotra said in a media interview on Tuesday that while the central bank does not generally use monetary policy to safeguard financial stability, the two cannot be fully separated.

Since last week, the RBI has rolled out a string of measuresto support the Indian rupee, including routing oil companies’ dollar purchases through a special facility and imposing cash margins on FX hedges.

The selloff in bonds underscored concerns that the RBI’s recent steps have shifted the burden of defending the Indian rupee onto the rates curve by widening the differential with US yields.

RBI’s measures and mounting inflation risks have both increased wagers of a December rate hike, traders said.

India’s annual wholesale inflation accelerated at a faster-than-expected 11.39% in September, data showed on Wednesday. Retail inflation accelerated to 5.54%, and was set to cross the central bank’s upper tolerance limit of 6% in October.

On the day, oil prices rose 0.8% to $106 a barrel, adding to the pressure.

The RBI, which targets retail inflation, raised the repo rate last week for the first time in nearly four years.

“With CPI inflation already closer to the RBI’s upper limit of tolerance, if that is breached in upcoming data, a rate hike in December 2026 MPC meeting would be inevitable,” said Payal V. Pandya, vice president, Bajaj Broking Prive.

US inflation data due later on Wednesday may offer fresh cues on the Federal Reserve’s rate path.

Rates

India’s overnight indexed swap rates also surged sharply on expectations of a December rate hike.

The one-year OIS rate rose 10.25 bps to 6.4375%, while the two-year rate was up 8 bps at 6.5950%, and five-year rate jumped 4.75 bps to 6.7925%.