RBI's surprisingly hawkish tone in policy minutes weighs on Indian bonds

Selling hit Indian government bonds early on Thursday, according to Business Recorder, after minutes of the Reserve Bank of India's latest policy meeting showed a more cautious view on inflation. The yield on the 2036 benchmark rose to 6.8382% by 10:25 a.m. IST from Wednesday's close of 6.8170%. Governor Sanjay Malhotra noted that inflation has not spread widely through the economy, yet headline readings are climbing from levels that had been unusually subdued.

Policymakers are paying closer attention to price risks. STCI Primary Dealer still expects no rate changes at the next two policy meetings, though it sees a greater likelihood that December's policy will be a live decision. Retail inflation reached 4.45% in July, which remains inside the central bank's 2% to 6% tolerance band but sits above its 4% medium-term target.

Deputy Governor Poonam Gupta said there is little room left for further easing and that a rate increase could arise later this fiscal year, depending on how conditions develop. Brent crude held near $92 a barrel as tensions involving the United States and Iran stayed unresolved, and markets have started to price in higher interest rates. Because India is the world's third-largest oil importer, higher crude could pressure the rupee, add to inflation, and strain the current account and government finances.