Govt bond yields near three-year high after RBI's hawkish policy shift

The benchmark 10-year government bond yield rises to 7.24 per cent as the RBI shifts to withdrawal of accommodation, with foreign outflows and oil prices adding pressure

Government bond yields hardened after the Reserve Bank of India changed its policy stance to withdrawal of accommodation — which came as a surprise — while raising the policy repo rate by 25 basis points (bps) to 5.5 per cent.

 

The yield on the benchmark 10-year government bond settled at 7.24 per cent, the highest since December 13, 2023, against the previous close of 7.19 per cent.

 

“Yields are likely to remain around current levels unless there is some fresh action or commentary from the RBI or elsewhere. The market will now take cues from external factors such as crude oil, as well as the RBI’s use of different liquidity tools at various points. Any such measures will influence market expectations and could lead to a corresponding reaction in yields,” said the treasury head at a state-owned bank. 

 

 

 

In the current financial year, the yield on the benchmark 10-year government bond has hardened by 21 basis points, while since the onset of the US-Iran conflict, the bond yield has hardened by 58 basis points.

 

“The tone of the policy was hawkish, and now a hike in December is seen as confirmed, which led to the massive selling,” said a dealer at a primary dealership. “There is resistance at 7.25 per cent (yield on the benchmark 10-year government bond),” the person added.

 

Crude oil prices rose on Wednesday, with Brent futures up about 1.3 per cent to trade above $101 a barrel as supply risks in West Asia, including reports of Houthi strikes on Saudi infrastructure, kept the market on edge. Brent has held above $100 for most of the past month.

 

Persistent selling by foreign portfolio investors in debt and equity and the depreciation of the rupee, which prompted the RBI to sell dollars in the foreign exchange market, have kept the bond market under pressure. India's forex reserves fell by a record $18.3 billion in the week ended September 25.