India 10Y Yield Hits 2-Year High as RBI Tightens Policy

The yield on India’s 10-year G-Sec rose to around 7.23%, hitting more than two-year highs as investors weighed the RBI’s rate hike against persistent inflation risks, higher global bond yields, and elevated oil prices. The benchmark 6.94% 2036 bond yield gained 2 basis points, while the 10-year government bond yield later climbed 5 basis points after the RBI raised its repo rate by 25 basis points to 5.50%, the highest in a year and its first hike since February 2023. The move was in line with expectations and came as the central bank shifted its stance to “calibrated tightening,” with retail inflation reaching 4.8% in August after rising for 10 straight months. Markets are now watching for further liquidity tightening through additional debt sales or a modest increase in the cash reserve ratio. In September, the RBI sold INR 1 trillion ($10.39 billion) of bonds, the largest in at least a decade.

The yield on India’s 10-year G-Sec hovered around 7.2%, pausing gains after reaching two-year highs as investors braced for a potentially hawkish Reserve Bank of India policy decision, with nearly 60% of economists expecting a 25-basis-point rate hike. Traders are also awaiting guidance on the future pace of tightening and measures to absorb surplus banking-system liquidity, including a possible increase in banks’ cash reserve ratio or further bond sales. The RBI sold INR 1 trillion of government bonds in September, its largest sale in more than a decade, while rising overnight indexed swap rates signalled expectations of further policy tightening. The benchmark 6.94% 2036 bond yield has risen for seven consecutive weeks, gaining a cumulative 45 basis points, its longest such streak in more than a year.

The yield on India’s 10-year G-Sec rose to around 7.21%, reaching more than two-year highs as elevated US Treasury yields and expectations of a tighter RBI policy weighed on sentiment ahead of next week’s policy decision. The benchmark 6.94% 2036 bond yield closed at 7.19% on Wednesday, a two-and-a-half-year high, after rising 24 bps in September and 44 bps in the third quarter. The US 10-year Treasury yield climbed to 5.30%, its highest since 2007, while traders remained cautious ahead of an INR 330 billion debt sale. Meanwhile, markets are pricing in nearly 100 bps of RBI tightening over the next 12 months, with the one-year overnight indexed swap rate rising 21 bps in September to 6.21%. The RBI’s efforts to drain surplus liquidity following record $133 billion FCNR(B) inflows have further pressured yields, while the government’s plan to borrow nearly INR 8 trillion through March adds to supply concerns. Debt markets will be closed on Friday, with trading resuming on October 5.