India bonds may weaken mildly after RBI hike; 10-year yield seen near 7.25%

According to Business Recorder, Indian government bonds may keep weakening on Thursday after the Reserve Bank of India raised rates for the first time in almost four years and signalled further increases. The central bank also shifted to what it called calibrated tightening. The 2036 benchmark bond closed Wednesday at a yield of 7.2410 per cent, and a trader at a primary dealership expects it to trade between 7.21 and 7.25 per cent.

The trader said the 10-year benchmark should hold near 7.25 per cent unless a fresh open market sale is announced. Anurag Mittal of UTI AMC described the move as a normalisation of rates aimed at keeping real returns positive, not a sharp tightening of financial conditions. He added that roughly 100 basis points of increases are already priced in, so much of the yield adjustment has already taken place.

The RBI lifted its inflation forecast by 20 basis points to 5.2 per cent, while core inflation is now seen at 4.4 per cent, up from 4.3 per cent. Governor Sanjay Malhotra called the new stance a milder form of tightening that depends on incoming data. The central bank also refrained from withdrawing extra liquidity from lenders, a move seen as mildly supportive for bonds. In September it sold 1 trillion Indian rupees ($10.35 billion) of bonds, its largest such sale in at least a decade.