India 10-Year Bond Yield Rises to 7.38% High as RBI Tightens Liquidity
The yield on India 10 Year LPS Government Bonds Yield (TVC:IN10Y) climbed more than 1% to 7.386%, marking its highest level in over three years. The surge in bond yields follows a series of liquidity-draining measures and monetary tightening moves by the Reserve Bank of India.
To curb monetary expansion, the central bank recently delivered a 25-basis-point interest rate increase and signaled potential future hikes. Mutual funds responded by offloading longer-term sovereign debt, recording INR 378 billion in net bond sales between July and September, followed by another INR 51 billion in net sales across three sessions after the rate hike. Escalating energy costs, with Brent crude surpassing $100 per barrel, along with projections of September inflation rising to 5.4% year-on-year, have further fueled selling momentum in the bond market.
Investors are monitoring upcoming liquidity steps that will further absorb funds from the banking system. The Reserve Bank of India is scheduled to auction INR 250 billion in government bonds on Tuesday. Additionally, commercial banks will face an increase in their daily cash reserve requirement maintenance from 90% to 99% starting October 16, alongside ongoing foreign-exchange interventions that could reduce rupee liquidity.
Key points
- India 10-year government bond yields rose over 1% to 7.386%, reaching a three-year high.
- The Reserve Bank of India raised interest rates by 25 basis points and indicated further policy tightening.
- Mutual funds sold INR 378 billion in bonds from July to September and INR 51 billion more following the rate hike.
- The central bank plans an INR 250 billion bond sale on Tuesday and a cash reserve maintenance hike on October 16.
- Brent crude trading above $100 per barrel and expected September inflation of 5.4% added to inflation worries.
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Why are India 10-year bond yields rising?
Yields are rising due to Reserve Bank of India liquidity tightening, a recent 25-basis-point interest rate hike, and heavy bond sales by mutual funds. Rising crude oil prices above $100 per barrel and expectations of 5.4% inflation also increased selling pressure.
How is the Reserve Bank of India tightening liquidity?
The central bank plans to sell INR 250 billion in government bonds on Tuesday and will increase commercial banks' daily cash reserve requirement maintenance from 90% to 99% effective October 16. Foreign-exchange measures could also further drain rupee liquidity.
How much government debt have mutual funds sold recently?
Mutual funds recorded net sales of INR 378 billion in government bonds between July and September, followed by another INR 51 billion in net sales over the three sessions after the central bank's rate hike.