Indian Government Bonds Stay Rangebound After RBI Repo Rate Hike To 5.50%; Global Yields And Crude Oil Weigh

Indian government bonds traded in a narrow range on Thursday as investors assessed the Reserve Bank of India’s (RBI) first rate hike in nearly four years. The new repo rate of the RBI stands at 5.50%, following a 25-basis-point hike on Wednesday. With the rate hike, the central bank dropped its neutral stance and raised its inflation and growth projections.

The benchmark 6.94% 2036 government bond yield stood at 7.2404% at 11 am IST, unchanged from its previous level. Elevated global bond yields, rising crude oil prices and expectations of tighter domestic financial conditions kept investors cautious.

What Is Keeping Indian Bond Yields Under Pressure?

The RBI’s policy shift has put the focus on the possibility of further rate increases and tighter liquidity conditions. Traders expect the central bank’s stance, along with potential liquidity absorption, to weigh on bond prices.

The RBI did not announce additional measures to drain surplus banking-system liquidity on Wednesday, contrary to market expectations. The central bank had sold ₹1 trillion worth of bonds by last month, the largest amount in at least a decade. Traders expect that further such operations could follow.

Liquidity management remains an important consideration for the bond market. Rate increases without corresponding action to absorb surplus liquidity may have a more limited effect on financial conditions.

Global developments are adding to the pressure. Higher overseas yields and elevated crude oil prices have kept sentiment guarded as investors assess the direction of monetary policy.

How Much Further Could The RBI Raise Rates?

According to sources, the RBI is expected to deliver another 50 basis points of rate hikes over the next six months.

The outlook for government borrowing is another factor for investors. The central government and states plan to increase their issuance of longer-dated bonds in the coming months, adding to supply pressures in the debt market.

Meanwhile, overnight indexed swap (OIS) rates were mixed on Thursday as traders looked for fresh cues.

• One-year OIS rate: Fell 1 basis point to 6.24%.

• Two-year OIS rate: Dropped 1.25 basis points to 6.44%.

• Five-year OIS rate: Held at 6.725%.

The next moves in Indian bonds will depend on how investors assess the RBI’s tightening stance, liquidity management, government borrowing plans and global market conditions.

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