Indian government bonds fell for a 10th straight week on Friday, marking their worst streak in three decades. Rising crude oil prices and a hawkish central bank stance battered the market. The benchmark repo rate recently rose to 5.5%, and experts said the policy rate will touch 6% by February.
Synopsis
Indian government bonds have experienced their worst decline in thirty years, falling consecutively for ten weeks. Rising crude oil prices and a hawkish central bank stance have impacted the market negatively. The benchmark repo rate was recently raised to 5.5%, with further increases expected. The 2036 bond yield rose to 7.4740%, indicating a broader trend of increasing yields. These developments may significantly affect India's import bill and inflation outlook.
Indian government bonds fell for a 10th straight week on Friday, their worst falling streak in three decades, as elevated crude prices and bets of a hawkish central bank battered the market.
India's central bank earlier this month raised the benchmark repo rate to 5.5% and shifted its policy stance to "calibrated tightening," signalling it may be prepared to tighten policy rates further if price pressures become more entrenched.
The minutes of the meeting and the wider macroeconomic backdrop means that the policy rate will touch 6% by February, ICICI Securities Primary Dealership said in a note.
Indian government bonds have experienced their worst decline in thirty years, falling consecutively for ten weeks. Rising crude oil prices and a hawkish central bank stance have impacted the market negatively. The benchmark repo rate was recently raised to 5.5%, with further increases expected. The 2036 bond yield rose to 7.4740%, indicating a broader trend of increasing yields. These developments may significantly affect India's import bill and inflation outlook.
"While a 25 bps hike in December is a done deal, a bigger 50 bps hike could make sense tactically depending on incoming data and global developments."
On Friday, the benchmark 6.94% 2036 bond ended at 7.4740%, against 7.4596% in the previous session. The yield rose 9 basis points this week, after surging 62 bps in the previous nine weeks, the steepest rise since 1998. Yields move inversely to prices.
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The benchmark Brent crude was hovering around $115 a barrel, its highest in nearly six months, as rising geopolitical tensions heightened fears of further disruption to global energy supplies.
India is substantially exposed to a sustained rise in crude prices because it imports close to 90% of its oil requirements.
Higher oil costs widen the country's import bill, impact the currency and inflation outlook and weaken public finances.
RATES
India's overnight indexed swap rates stayed largely unchanged through the week, with most of the negatives already priced in.
The 1-year OIS rate ended at 6.58%, while the 2-year rate closed at 6.65% and the liquid 5-year rate settled at 6.8150%.
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