Indian government bonds fell in early trade on Thursday after the U.S. Federal Reserve raised rates for the first time since July 2023 and signalled another hike later this year, adding pressure on the RBI to follow suit.
The benchmark 6.94% 2036 bond yield was at 7.0779% as of 10:10 a.m. IST, after closing at 7.0524% on Wednesday.
U.S. Treasury yields rose on Wednesday, with the 10-year Treasury yield stuck around the 5% mark after the Fed flagged at least another 25 basis point move further in the next quarter to control inflation. The decision, the Fed's first such move in over three years, was unanimous.
Market bets on a rate hike at the Fed's next meeting in late October held at roughly 50%, and jumped to nearly 90% for such a move in December, according to CME FedWatch.
DBS expects the Fed to hike in December and once more in early 2027 as the Fed statement also reflects sufficient comfort with growth, consumption, labour market, and productivity to retain the focus on inflation for the time being.
Back home, investor sentiment continues to deteriorate ahead of the Reserve Bank of India's planned open market sale of debt, with the first tranche taking place later in the day.
The RBI will sell bonds worth an aggregate of 1 trillion rupees ($10.43 billion) this fortnight, including 500 billion rupees on Thursday.
With OMO sale and elevated August retail inflation print, analysts have hardened bets on an October rate hike, with large foreign banks including Citi and Deutsche Bank advancing their rate-hike calls to October.
A 25 bps RBI rate hike in October looks more likely, but we expect this to be a shallow 50-75 bps hiking cycle, Emkay Global said.
RATES
Overnight indexed swap (OIS) rates moved by around 5 bps across major part of the curve with strengthening bets of an October rate hike.
On Wednesday, the one-year rate was at 6.14%, while the two-year rate was at 6.35%, and the five-year rate moved to 6.67%.
