India Bonds Post Ninth Weekly Loss as RBI Tightening Weighs

Indian government bonds recorded a ninth consecutive weekly loss as the Reserve Bank of India’s efforts to support the rupee and withdraw excess liquidity weighed on demand, Economic Times Markets reported on October 16. The benchmark 6.94% 2036 bond’s yield climbed about 8 basis points during the week to 7.3789%, taking its cumulative rise over nine weeks to more than 62 basis points. Bond prices move inversely to yields. The report linked weaker sentiment to the central bank’s open-market bond sales, inflation pressures and growing expectations of a larger December rate increase. The 6.36% 2031 note’s yield rose 18 basis points during the week.

The policy outlook also unsettled investors. In remarks on Tuesday, the RBI governor said monetary policy and financial stability could not be entirely separated, even though monetary policy was not generally used to safeguard financial stability. Nomura interpreted the central bank’s comments as indicating that inflation was no longer the only influence on policy decisions, and expected further measures addressing speculation and balance-of-payments flows if global stress persisted. Sources and analysts cited in the report anticipated additional tightening to discourage capital outflows and make bets against the rupee more expensive. These were expectations, not announced decisions. Traders also worried that the RBI might accept higher bond yields to maintain India’s yield premium over US debt; the reported 10-year spread widened to 227 basis points from 206 a week earlier.

Heavy longer-maturity borrowing schedules for the Centre and states added to the pressure, although falling US Treasury yields offered some relief. The US 10-year yield declined more than 13 basis points over the week to 5.11%. India’s overnight indexed swap curve, meanwhile, flattened as shorter-term rates rose faster: the one-year rate increased 32 basis points to 6.56%, the two-year gained 18 to 6.6225%, and the five-year added 6 to 6.7875%. The one-year increase was the largest weekly rise of the financial year, according to the report.