Government security yields hardened on Friday as October retail inflation hit 6.09 per cent, breaching the RBI’s tolerance limit. Tracking rising US Treasury yields, the benchmark 10-year G-sec closed at 7.31 per cent. Market players now expect the RBI to hike the repo rate by 25 basis points to 5.75 per cent.
Yield of government securities (G-Secs) hardened on Friday, tracking rising US Treasury yields, amid the October 2026 retail inflation reading breaching the Monetary Policy Committee’s upper tolerance level of 6 per cent.
Yield of the benchmark 10-year G-sec (6.94 per cent GS 2036) is currently closed at 7.31 per cent against previous close of 7.25 per cent, up 6 basis points.
With the retail inflation perking up beyond 6 per cent (to 6.09 per cent), market players expect the RBI’s rate-setting panel to up the policy repo rate by 25 basis points to 5.75 per cent from the current 5.50 per cent. The panel had raised the repo rate by 25 bps from 5.25 per cent 5.50 per cent on October 7.
Subsidy impact
The players are also watchful about the fiscal impact of the higher fertilizer subsidy announced by the government for the October-March crop (Rabi) season.
The auction of the benchmark 10-year G-Sec sailed through, with the cut-off yield coming in higher at 7.3203 per cent, a shade higher than the prevailing secondary market yield. This indicates that bidders demanded higher yield (wanted to buy the paper at a lower price). Bond yields and prices are inversely co-related and move in opposite directions.
The government borrowed ₹34,000 crore via the auction. The auction cut-off yield at today’s auction, however, was about 8 basis lower than the last auction, conducted on October 16.
SBI Capital Markets, in a report, said: “Our study shows that yields broadly mimic the path of rates, which in the FIT (Flexible Inflation Targeting) regime, have followed movements in inflation and its expectations.
“Beyond inflation, real rate in India remains broadly stable unlike the developed world, where it is rising. Accordingly, since projected inflation peaks in Q3FY27, the high points of benchmark yield belong to H2FY27, after which bond yield could moderate.”
Rupee weakens
Meanwhile, the rupee weakened for the second day on the trot, weighed down by rising crude oil prices and a strengthening dollar.
The Indian currency closed at 94.24 per US dollar against the previous close of 94.04.
Rajeev Sharan, Head of Research, Brickwork Ratings, said: “Two things are pulling against the currency’s recent strength. Brent has rebounded to around USD 95.50 after reported attacks on Saudi oil facilities and fading hopes of a US-Iran deal, reviving the import-bill worry that had just eased. And October inflation breached the RBI’s 6 per cent ceiling at 6.09 per cent, raising the odds of a December rate move.”
He opined that the inflation print is a double-edged sword for the rupee: it signals cost pressure, but a December hike would also widen India’s already sizeable rate advantage over the US and support the currency’s carry appeal.
Sharan said: “Strong foreign inflows… remain a genuine cushion. The near-term swing factor is oil: if Brent climbs back, the rupee’s recovery stalls; if it resumes falling, 94 holds.”