India Bonds Face Worst Week of FY27 Amid RBI Policy Shifts
By Market Desk
Indian government bonds endure their worst week of FY27, impacted by the RBI’s hawkish policy pivot and the closure of a key hedging facility, leading to rising yields.
Indian government bonds recorded their most challenging week of the financial year, impacted significantly by the Reserve Bank of India’s (RBI) unexpected policy shifts and rising crude prices.
The market downturn reflects a confluence of factors, primarily stemming from the central bank’s unexpectedly hawkish policy minutes and the premature closure of a diaspora-deposit hedging facility.
Understanding the Policy Shift
Traders closely analyzed the RBI’s August meeting minutes, which clearly signaled an abrupt end to its current easing cycle.
This indicates a firm expectation that any future rate adjustments by the RBI will be increases, moving away from previous considerations of reductions.
Market Response to RBI’s U-Turn
The benchmark 6.94% 2036 bond yield saw a notable climb, reaching a two-month high of 6.8495%.
This specific bond registered its sharpest weekly increase since early April, underscoring the market’s rapid repricing of sovereign debt.
Furthermore, the five-year note, which was particularly sensitive to the hedging facility’s closure, experienced a significant yield jump of 13 basis points.
Inflationary Pressures and Future Rate Expectations
Compounding these domestic policy concerns was a significant rise in Brent crude prices globally.
Higher crude prices fueled widespread concerns about accelerating inflation within India, intensifying the anticipation of future rate hikes.
MUFG Bank now anticipates a substantial 50 basis point rate hike from the RBI, with this adjustment projected to commence in December.
This forward-looking expectation has already triggered a rapid repricing of rate hike expectations in overnight indexed swaps, leading to marked increases across one-year, two-year, and five-year rates.