Indian government bonds witness decline today: What's the reason?
What's the story
Indian government bonds witnessed a decline in early trading today. The fall comes as investors brace for potential hawkish monetary policy moves from the Reserve Bank of India (RBI). The yield on the benchmark 6.94% 2036 bond rose to 7.2213% at 10:10am IST today, up from yesterday's close of 7.2108%.
Yield trend
Government bond yields rise for 7th consecutive week
The yield on Indian government bonds has been on an upward trajectory for the past seven weeks.
In this period, it has risen by a total of 45 basis points, marking its longest such streak in over a year.
A Reuters poll indicated that almost 60% of economists expect the RBI to raise its key policy rate by 25 basis points.
Market expectations
Traders await RBI's growth, inflation outlook
While a 25 basis point hike seems to be the market's base case, traders say the response in government bonds will depend more on the RBI's outlook on future tightening cycles, inflation risks, and growth sustainability.
DBS Bank expects the central bank to raise its repo rate.
A shift from withdrawal of accommodation to neutral in October or December would also highlight a hawkish stance.
Investor focus
Investors watch for measures to absorb excess liquidity
Market positioning indicates that most of the expected tightening is already priced into bonds.
Investors are now closely watching for more measures to absorb excess banking-system liquidity. This could be through an increase in banks' cash reserve ratio or another round of debt sale.
The RBI sold bonds worth $10.4 billion in September, its largest sale for any financial year in over a decade.