The Reserve Bank of India raised its key interest rate by 25 basis points to 5.5% as expected and shifted its stance to "calibrated tightening" from "neutral," signalling that next moves would be a hike or a pause.
"The shift in policy stance comes as a modest surprise," Sachin Bajaj, chief investment officer at Axis Max Life Insurance, said.
Bonds Corner Powered By India bonds tumble after RBI's first rate hike in nearly four years
In a bid to combat inflation, the Reserve Bank of India has increased the key interest rate to 5.5%. This decision has led to a notable dip in Indian government bonds in the market. Factors such as climbing global oil prices are further complicating the economic landscape. While the 10-year bond yield remains high, forecasts suggest that interest rates may continue to rise this fiscal year.
US 30-year bond yield hits fresh 24-year highIndia bonds inch lower before pivotal RBI decisionIndian bonds rangebound as traders await a hawkish RBI verdictWhy junk bonds deliver equity-like returns but with far inferior volatility, explains Saurabh Mukherjea Browse all Bonds News with"Given that current bond yields are already factoring in the possibility of three to four rate hikes during the current cycle, we expect the 10-year bond yield to remain elevated in the 7.25%-7.50% range for this fiscal year."
India's benchmark 6.94% 2036 bond settled at 7.2410%, up 5 basis points from the previous close. It tested a near three-year high of 7.2655% during the policy.
Bonds have been battered by the Iran war-led jump in oil prices and a global debt rout that have led to rate hikes across the globe.
India, the world's third largest oil importer and consumer, is grappling with rising inflation and a weakening rupee as Brent crude stays atop $100 per barrel and global yields trade at multi-decade highs.
The rupee neared a record low, and stocks declined.
"We maintain a cumulative rate hike of 75bp in this cycle," said Madhavi Arora, chief economist at Emkay Global Financial Services.
The RBI said it may continue using tools such as open market bond sales, variable-rate reverse repos and forex swaps to absorb excess banking-system liquidity. Governor Sanjay Malhotra said that no option, including the central bank's least preferred cash reserve ratio hike, could be ruled out.
The large cash surplus is likely to be exhausted by the end of the financial year, Malhotra said.
RATES
India's overnight indexed swap rates marched higher as an RBI hike compounded the pain from climbing US yields and oil prices.
"We don't quite like chasing rates higher at these levels given how much has been priced in the front-end," MUFG said in a note.
The one-year OIS rate rose 1.25 bps to 6.25%, the two-year rate was up 3.75 bps at 6.4525%, and the liquid five-year rate rose 5.25 bps to 6.7225%.
Add as a Reliable and Trusted News Source Add Now!
(You can now subscribe to our ETMarkets WhatsApp channel)