Indian government bonds fell early on Friday, on course for a sixth straight weekly loss, with the benchmark 10-year bond yield perched at a four-month peak of 7.1391% at 11:15 a.m. IST, after closing at 7.1067% on Thursday. The yield was up about 7 basis points this week, after climbing more than 30 basis points over the previous five weeks, marking the worst session for the benchmark 10-year bond in over two months. The government is set to sell ₹34,000 crore of the benchmark 10-year note later in the day, testing demand in a market already pressured by policy-tightening expectations, oil-driven inflation and rising global yields. As per The Economic Times, bond yields move inversely to prices, meaning the higher yields reflect the intense selling pressure in the bond market.
US Treasury yields remaining above 5% is likely to impact investor confidence in India, with uncertainty among investors over whether to remove funds from equity markets and prefer safer returns such as bonds, according to NDTV Profit. Peter McGuire, Chief Strategist Asia-Pacific at XM.com, explained that "I think it's going to be consumer confidence. You know, market sentiment is one of great concern. Where do people look for a return on an equity? Do they say, I'll go out of the market, I'll I'll I'll remove funds from from the equity markets, and look for the safe return as far as bond yields." When two-year US Treasury yields are above 5%, or even close to that level, the returns become particularly attractive for investors seeking relatively safe assets, as noted by McGuire. There's always that in the back of people's minds as far as, yes, there's a fear of missing out for further gains, but there's also a safety mechanism built into trading mindsets, with investors increasingly looking at the safety of bonds given their government backing.
The global debt rout intensified overnight, with the U.S. 10-year Treasury yield rising above 5.20%, its highest since 2007, while Japan's 10-year yield rose to 3.115%, a level last seen in August 1996, and Germany's 10-year yield hit a 17-year high of 3.5798%. Brent crude hovered near $105 a barrel, keeping inflation risks elevated for oil-importing India, with markets weighing the possibility of a US-Iran truce. Oil prices fell for a sixth straight session, with Brent crude declining nearly 10% to $98 per barrel after climbing to around $110 last week, providing continued relief to investors concerned about inflation and higher interest rates.
The weighted average call rate (WACR) crossed the repo rate for the first time in nearly two months, reaching 5.31% on Tuesday compared to 5.24% on Monday, as reported by The Economic Times. Banking system liquidity has contracted to below ₹5 lakh crore, falling from a surplus of ₹11.16 lakh crore earlier this month to ₹4.91 lakh crore on Monday. The RBI has conducted multiple operations including open market operations (OMO) sales, variable rate reverse repo (VRRR) auctions, and weekly government securities auctions to drain excess liquidity from the banking system. The RBI drained ₹71,971 crore via a VRRR auction on Tuesday, with another ₹75,000 crore VRRR auction scheduled for Wednesday. As per AN Vinod, head of treasury at South Indian Bank, the RBI is comfortable with a surplus of ₹3-4 lakh crore while maintaining liquidity to 1% of NDTL, with government expenditures and bond sales expected to increase liquidity to around ₹5 lakh crore by month-end.
Policy tightening bets in India have hardened after August retail inflation accelerated to 4.82% and the Federal Reserve raised interest rates by 25 basis points earlier this month, as reported by The Hindu BusinessLine. Most market participants now expect the Reserve Bank of India to raise rates on October 7, with a senior state-run bank official stating "An October hike looks definite. It will be a surprise if it does not happen, and yields will shoot up." As per The Economic Times, market participants anticipate a repo rate hike on October 7 due to economic conditions, with higher oil prices intensifying inflation worries ahead of the RBI's monetary policy meeting. DBS Bank warned that a gradual broadening of price pressures is likely to keep headline inflation above 5% in the second half of the fiscal year, sharply narrowing the real rate buffer and underscoring the need for a tighter policy bias. Q3 FY27 inflation is projected at 5.9%, which would leave the RBI uncomfortably close to the upper tolerance band of 6%.
