Indian government bonds made a recovery on Thursday as falling oil prices triggered short-covering and eased anxiety over prospects of a Reserve Bank of India rate hike after the Federal Reserve's first rate increase in more than three years. The benchmark 6.94% 2036 bond yield settled at 7.0463%, marginally below Wednesday's close of 7.0524%, as bond yields move inversely to prices. Oil prices extended losses on Thursday after reports of additional Saudi crude cargoes through Oman eased supply concerns, though Brent remained above $100 a barrel amid fears the Middle East conflict could widen. The U.S. 10-year Treasury yield also reversed early gains, falling 3 basis points to 4.97% by 5:00 p.m. IST, creating additional pressure on global bond markets.
India's bond market faces continued pressure as the Reserve Bank of India (RBI) drains liquidity through aggressive cash-withdrawal operations, including open-market bond sales that added to supply pressure. According to The Economic Times, the central bank absorbed liquidity equivalent to nearly 0.2% of total bank deposits through bond sales on Thursday. The RBI will sell bonds worth an aggregate of ₹1 lakh crore this fortnight, including ₹50,000 crore on Thursday, demonstrating the scale of liquidity management required to maintain monetary policy effectiveness. Foreign investors cut their holdings by ₹2,470 crore on Tuesday, following an outflow of ₹4,730 crore on Friday, marking the biggest outflow since April last year.
Overnight indexed swap (OIS) rates reversed course late in the trading session on easing oil prices, with the one-year rate down 4 bps at 6.04%, two-year rate falling 5.5 bps to 6.25%, and five-year rate dropping 4.75 bps to 6.58%. As per The Economic Times, this recovery in OIS rates indicates improving market sentiment despite ongoing liquidity drains. The Fed's widely expected 25-basis-point rate increase even after repeated calls from President Donald Trump for cuts boosted its inflation-fighting credibility with investors, though uncertainty over the eventual peak in U.S. rates is likely to keep global stocks and bonds volatile.
Indian rate-hike expectations hardened further after the Fed's move, with rate hike bets rising after India's retail inflation accelerated in August, with risks skewed higher from El Nino and crude oil prices. According to The Economic Times, the Fed's 25-bps hike appears to mark the start of a prolonged tightening cycle, as noted by Apoorva Javadekar, chief economist at Shriram Group. A 25 bps RBI rate hike in October looks more likely, but we expect this to be a shallow 50-75 bps hiking cycle, according to Emkay Global. With the OMO sale and elevated August retail inflation print, analysts have hardened bets on an October rate hike, with large foreign banks including Citi and Deutsche Bank advancing their rate-hike calls to October.
In a significant financial development, Reliance Industries aims to secure ₹12,500 crore via a five-year bond issuance, orchestrated by Indian banks, as reported by The Economic Times. As liquidity from foreign currency deposits rises, banks are keen to channel these resources into corporate lending, with this substantial inflow predicted to stimulate credit growth in the near future. The bond sales will precede New Delhi's bond auction on Friday, adding to supply pressure in the corporate bond market, while the banking system's cash surplus reached an all-time high of about ₹11 trillion ($115 billion) before the RBI's intervention.
