Indian bonds are experiencing a notable decline, with yields rising across various maturities. The yield on the 6.94%, 2036 bond increased by 7 basis points to 7.09%, while the 6.36%, 2031 note saw a 16 basis point climb to 6.78%. This selloff is partly attributed to the Reserve Bank of India's (RBI) announcement of sovereign note sales to absorb excess cash from lenders, adding to the already substantial supply of debt from record government borrowing. This domestic pressure coincides with a broader global bond selloff, which saw the US 10-year Treasury yield surpass 5% for the first time since 2023.
The RBI's decision to drain ₹1 lakh crore (approximately $12 billion) of surplus liquidity through government bond sales has particularly impacted short-term bonds. Five-year bond yields jumped as much as 22 basis points to 6.80%, marking the steepest rise since May 2022. This move is aimed at managing the excess liquidity in the banking system, which accumulated from recent RBI measures designed to attract foreign capital. Analysts, like VRC Reddy from Karur Vysya Bank, note that the five-year segment was previously richly valued and is now bearing the brunt of the RBI's stringent action.
Several factors are contributing to the negative sentiment in the Indian bond market. The domestic inflation outlook has worsened, with August inflation data showing a rise closer to the upper end of the RBI's 2%-6% target range. Concurrently, rising crude oil prices, with Brent crude around $105 per barrel, are fueling inflation risks and straining India's external finances. This confluence of factors has led to expectations of tighter monetary policy, with some analysts, like those at Citi, forecasting an RBI rate hike as early as October, and Kotak Mahindra Bank economist Upasna Bhardwaj anticipating a 50-75 basis point increase in borrowing costs.
Furthermore, the Indian rupee has weakened, closing 0.4% lower at 95.96 per dollar, its weakest level since late July, with the RBI reportedly intervening to support the currency. The bond market also faces increased supply pressure, with nearly ₹8 lakh crore (approximately $96 billion) of federal borrowing expected in the next six months. The RBI plans to conduct bond sales in three tranches, starting September 17, with a focus on maturities between three and six years, ensuring this segment remains particularly sensitive to policy actions and rate expectations.
The global context further exacerbates the situation. The continuous global bond selloff, coupled with expectations of a US Federal Reserve rate hike – potentially a 25-basis-point increase this week – is adding to the pressure on Indian bonds and the rupee. This international trend, along with domestic challenges, underscores the difficult environment for India's financial markets.
