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 lakh crore
this fortnight, including ₹50,000 crore
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%.