RBI-led bond selling actions causing a slight increase in Indian bond yields this week
The Indian government, through the Reserve Bank of India (RBI), implemented a series of interest rate cuts in 2021 to support economic growth amid the pandemic-induced slowdown. However, the hawkish inflation outlook constrained further cuts, leading to a cautious or neutral policy stance rather than aggressive rate easing.
In 2021, the RBI reduced the repo rate multiple times to find a balance between stimulus and inflation control. Despite the easing inflation trend, inflation pressures remained a concern, particularly due to oil price firmness and resilient domestic demand, limiting aggressive rate cuts.
Market expectations were mixed, with some forecasting further cuts if the growth outlook weakened, but inflation’s hawkish signals and global uncertainties restrained immediate additional easing. By mid-2021, the RBI had shifted its stance from accommodative to neutral due to inflationary pressures, signaling caution against further rate cuts.
On Friday, New Delhi sold bonds, despite fears of weak interest after the RBI's decision on Wednesday that triggered a large selloff, dampening rate cut expectations. The demand for the bonds auctioned by New Delhi was strong, but the one-year OIS rate ended at 5.50%, and the liquid five-year OIS rate finished at 5.67%. The two-year OIS rate ended at 5.4550%.
The RBI maintained interest rates on Wednesday, signalling a hawkish inflation outlook for next year. The yield on the benchmark 10-year Indian government bond ended at 6.4121% on Friday, rising by 4 basis points for the week.
Tanvee Gupta Jain, chief India economist at UBS Securities, suggests a 25 bps rate cut in October. UBS Securities predicts inflation to average at 3% this year and expects the terminal repo rate to fall to the 5.0%-5.25% range. However, there is a divide in the market regarding further rate cuts, with some analysts suggesting no further cuts and others expecting at least one more reduction.
The RBI expects inflation to rise above 4% from January 2023, but the potential risk of another rate cut if growth surprises lower due to US trade tariffs remains. This balanced approach reflects the RBI’s dual mandate to keep inflation in check while supporting economic recovery.
- The Indian government's decision to maintain interest rates, as announced by the Reserve Bank of India (RBI), was influenced by a hawkish inflation outlook for next year.
- The strong demand for the bonds auctioned by New Delhi earlier in the year ended with higher one-year OIS, two-year OIS, and liquid five-year OIS rates.
- Despite the predicted average inflation of 3% for this year, there is a division in the market regarding whether there will be any further interest rate cuts.
- The RBI's decision to reduce the repo rate multiple times in 2021 was aimed at finding a balance between stimulating economic growth and controlling inflation.
- The potential risk of another interest rate cut remains if economic growth surprises lower due to US trade tariffs, as the RBI has a dual mandate to maintain inflation control and support economic recovery.
