RBI liquidity measures may pressure India bonds; rupee rally to limit losses

Business Recorder reported that Indian government bonds may start the week with modest losses, as the central bank moved to drain liquidity from the banking system. Hopes of a steep rupee recovery, however, could cushion the decline. A trader at a primary dealership expects the benchmark 6.94% 2036 yield, which closed Friday at 7.2994%, to move between 7.26% and 7.32%.

Over the weekend, the Reserve Bank of India unveiled fresh steps to support the rupee, which hovers near record lows. Oil companies will have their dollar purchases redirected away from the spot market, and hedging rules have been tightened. The RBI also plans to offload 250 billion rupees ($2.58 billion) of debt on Tuesday and has tightened daily reserve maintenance norms for banks from October 16.

These measures follow a recent policy rate increase and a shift to calibrated tightening, with signals of further hikes ahead. The central bank also raised its inflation forecast by 20 basis points to 5.2%, while core inflation is seen at 4.4%, up from 4.3%. A Reuters poll expects September retail inflation to reach 5.4% year-on-year, while Brent crude is holding near $105 a barrel. Elevated energy prices, given India's dependence on imported oil, could weigh on its inflation path and government finances.