Govt bond yields seen opening higher after hawkish RBI MPC minutes

Market participants expect the 10-year bond yield to rise 1-2 bps and the five-year yield 2-3 bps as traders factor in the possibility of a December rate hike

Government bond yields are expected to open higher on Thursday following the release of the MPC minutes, as market participants increasingly factor in the possibility of a rate hike in December after several committee members highlighted the need for policy tightening if inflation risks materialise.

 

However, the rise in domestic yields may be capped by the decline in US Treasury yields after the US Treasury increased long-end issuance and indicated the possibility of buybacks, dealers said.

 

Market participants expect the yield on the 10-year benchmark government bond to rise by 1-2 basis points, while the five-year segment could see a sharper increase of 2-3 basis points as traders reassess the policy outlook. Overnight indexed swap rates are also expected to rise by around 5 basis points, reflecting expectations of a tighter interest rate environment.

 

 

The yield on the benchmark 10-year government bond settled at 6.82 per cent on Wednesday against the previous close of 6.83 per cent.

 

"Markets are expecting a December rate hike. The only positive is that US Treasury yields are down, as the US Treasury has increased long-end issuance and may undertake buybacks. So, while the market should have opened worse, the impact may not be as severe. The 10-year yield could be higher by 1-2 basis points, while the 5-year yield could rise by 2-3 basis points. OIS could be higher by around 5 basis points," said a dealer at a private bank.

 

The minutes showed that policymakers remain concerned about food and fuel prices feeding into broader inflation, with members repeatedly highlighting the risk of second-round effects. At the same time, the committee noted that there was little evidence of a generalisation of price pressures, leading it to retain both the policy rate and the neutral stance.

 

Analysts interpreted the minutes as being more hawkish than the policy statement itself.

 

"The MPC minutes were materially less neutral relative to the policy statement," Barclays said in a report. The report added that most members discussed the possibility of "tightening", "hiking" or "recalibration of the policy rate" if inflation risks materialise or remain elevated.

 

Meanwhile, economists continued to expect the central bank to remain on hold for the rest of the year, arguing that incoming inflation data have yet to justify a policy response. Barclays maintained its expectation of no change in policy rates in 2026 and said an earlier rate increase would depend on evidence of sustained second-round effects.

 

Further, multiple members highlighted the need to monitor real rates, suggesting that the measure could play a larger role in future policy deliberations if inflation remains elevated over the coming quarters.

 

The State Bank of India said in a report that the August minutes reflected "maximum hawkishness in the last one year", but noted that policymakers were "veering towards calibrated policy action" rather than signalling an immediate rate increase. The report added that "5/6 leave the door open to tightening or recalibration" even though all six members voted to maintain the policy rate and stance.

 

For the bond market, upcoming inflation readings and the progress of the monsoon are likely to remain the key variables.

 

Dealers said any evidence of inflation becoming broad-based could strengthen expectations of a December rate increase, while benign inflation prints could allow yields to retrace recent losses.