Indian government bonds sagged for a fifth consecutive week on Friday as a Federal Reserve rate hike and the Reserve Bank of India‘s liquidity clampdown emboldened bond market bears positioning for domestic policy tightening ahead.
The benchmark 6.94% 2036 bond yield closed at 7.0686% on Friday, up from 7.0463% on Thursday, taking its weekly rise to 4.5 basis points.
The market weathered a triple jolt this week: a debt rout that thrust global yields to multi-decade peaks; a Fed rate hike that recast the outlook for RBI tightening; and the local central bank’s bond sales, which added supply pressure in a demand-light market.
The Fed’s widely expected 25-basis-point rate hike on Wednesday fortified its inflation-fighting resolve in investors’ eyes, while also raising the chances of an RBI rate hike in October, traders said.
The Fed’s decision will add to calls for the RBI to hike in its October meeting to maintain India’s interest rate differential with the US and mitigate any large potential foreign fund outflow, said Ajit Banerjee, president and chief investment officer at Shriram Life Insurance.
The US 10-year Treasury yield probed 5.03% this week, its highest level since the 2008 financial crisis, spurring foreign investors to retreat from risk, including by unloading Indian government bonds that are part of global indexes.
Meanwhile, the RBI, through its first open market operation bond selling in nine years, drained liquidity equivalent to nearly 0.2% of total bank deposits on Thursday.
The RBI will likely step up these operations going forward, traders said, as a large liquidity surplus in the banking system can blunt monetary-policy transmission by curbing banks’ need to borrow at the RBI’s policy rate.
RATES
Overnight indexed swaps rose on firmer domestic rate hike wagers.
For the week,the one-year rate leapt 4 bps to 6.0725%, the two-year rate rose 4 bps to 6.28% and the five-year rate added nearly 2 bps to 6.5875%.
