Key Takeaways
- Indian government bonds set to decline as US Federal Reserve hikes interest rates.
- Reserve Bank of India may follow suit to combat rising inflation.
- RBI to sell bonds worth 1 trillion rupees this fortnight.
Indian government bonds are expected to decline on Thursday, as the US Federal Reserve hiked interest rates for the first time since July 2023. The benchmark 6.94% 2036 bond yield is anticipated to trade between 7.05% and 7.10%, according to a trader with a primary dealership.
The trader stated, 'There are fewer reasons to believe that the Reserve Bank of India will not hike rates next month, and a test of levels seen earlier in the week is on the cards.'
US Treasury yields ended higher on Wednesday, with the 10-year Treasury yield above 5% and the 2-year yield closing near 4.75%. The decision, the Fed’s first such move in over three years, was unanimous. New policy projections showed 16 of 18 policymakers anticipate at least one more quarter-percentage-point hike by the end of this year.
Market bets on a rate hike at the Fed’s next meeting in late October held at roughly 50%, according to CME FedWatch. The move comes after the Fed raised interest rates and flagged further increases in borrowing costs next quarter to control inflation.
Back home, investor sentiment continues to deteriorate ahead of the Reserve Bank of India’s planned open market sale of debt, with the first tranche taking place later in the day. The RBI will sell bonds worth 1 trillion rupees ($10.42 billion) this fortnight, including 500 billion rupees on Thursday.
Analysts have hardened their bets on an October hike after annual CPI inflation rose 4.82% in August from 4.45% in July. Citi and Deutsche Bank have brought forward their rate-hike call to October.
The Reserve Bank of India is expected to follow the US Federal Reserve’s lead to address rising inflation, which could lead to further declines in bond prices. The central bank’s decision to sell bonds is part of its strategy to manage liquidity and control inflation.
There are fewer reasons to believe that the Reserve Bank of India will not hike rates next month, and a test of levels seen earlier in the week is on the cards.
Trader with a primary dealership, Trader
