India bond selloff to continue as RBI policy minutes hint at more rate hikes

MUMBAI: Indian government bonds are likely to weaken further in early deals on Thursday, after minutes of the latest monetary policy meeting showed that members of the rate-setting panel indicated further rate hikes may be needed to curb inflation.

The benchmark 6.94% 2036 bond yield may trade between 7.40% and 7.47%, according to a trader at a primary dealership, after closing at 7.4427% in the previous session.

The Reserve Bank of India’s Monetary Policy Committee had raised the repo rate by 25 basis points to 5.50% earlier this month, its first hike in nearly four years.

It also shifted its stance to “calibrated tightening” from “neutral”, hinting at more hikes to come.

A sharp rise in oil prices due to war in the Middle East and a deficient monsoon rain season have sparked a jump in food prices, stoking inflation worries and prompting markets to price in a little over 100 bps of hikes in the next 12 months.

With oil continuing to exhibit an upside bias and more signs of generalisation of inflation pressures seen in the September inflation print, the RBI may continue tightening, analysts at Yes Bank said in a note.

“Our base case remains for an incremental 50 bps increase in policy rates – 25 bps each for December and February.”

Meanwhile, the benchmark Brent crude contract stayed above $110 per barrel, as more attacks by the Houthis on Saudi Arabia prompted the United States to order some diplomats and family members to leave its missions in the Kingdom.

India is particularly vulnerable to elevated energy prices as it imports nearly 90% of its requirement.

Consistently elevated prices risk feeding into the nation’s inflation trajectory, impacting the rupee and government finances.