Government bond yields hit a three-year high on Friday as market fears over RBI liquidity measures grew. The 10-year G-Sec yield touched 7.31 per cent. Rajeev Pawar said, “The expectation now is that the RBI wants to withdraw more liquidity than earlier anticipated.” Investors now expect further bond sales soon.
The government bond yields climbed to a three-year high on Friday, reflecting mounting market concerns over persistent inflation, tighter liquidity conditions and the possibility of additional liquidity-draining measures by the Reserve Bank of India (RBI).
The benchmark 10-year government security (G-Sec) yield touched 7.31 per cent, its highest level since November 2023, before settling near 7.30 per cent at close. The bond had opened at 7.26 per cent, briefly eased to 7.25 per cent and then climbed sharply through the session.
Sharp rise
The sharp rise in yields follows a hawkish shift in market expectations after the RBI’s monetary policy announcement earlier this week. While markets had largely priced in a 25 basis point rate hike, investors were caught off guard by the central bank’s warning on inflation risks and its indication that interest rates may need to remain elevated for longer.
A key trigger behind the sell-off has been expectations that the RBI will continue aggressively draining surplus liquidity from the banking system through open market operation (OMO) sales. The central bank has already announced an OMO sale of ₹25,000 crore on October 13, and treasury officials expect further sales that could cumulatively amount to around ₹1 lakh crore in the coming weeks.
“The market was comfortable with surplus liquidity of around ₹3-4 lakh crore remaining in the system. The expectation now is that the RBI wants to withdraw more liquidity than earlier anticipated,” said Rajeev Pawar, Head of Treasury at Ujjivan Small Finance Bank. He added that given the heavy supply of government bonds and changing liquidity conditions, a gradual move towards 7.5 per cent on the benchmark yield before the next policy meeting remains a possibility.
Retail inflation data
Markets are also bracing for higher retail inflation data due next week. V Rama Chandra Reddy, Head of Treasury at Karur Vysya Bank, said, “Expectations of elevated inflation combined with additional OMO sales have contributed to the persistent hardening in yields.”
The repricing in the bond market has become more pronounced after RBI Governor Sanjay Malhotra ruled out the possibility of rate cuts and indicated that inflation pressures could remain elevated in the coming months. “While the general consensus was that the repo rate would to peak between 5.75 per cent and 6 per cent, the market is now pricing in a terminal rate as high as 6.25 per cent by FY27, implying a cumulative tightening of as much as 100 basis points from current levels,” said Reddy.