Indian bonds may be heading into a challenging stretch after the Reserve Bank of India’s dramatic move to cap onshore currency wagers raises the possibility of stronger measures — including possible interest rate hikes — to support the rupee.
The 10-year yield rose nine basis points to 7.04% on Monday, breaking above the 7% level that the central bank had strongly defended with its debt purchases just last month. This is the highest level since June 2024, and analysts expect yields to rise as high as 7.25% in the coming weeks. The local bond and currency markets were shut Tuesday and Wednesday for a holiday.
The RBI’s crackdown on bearish rupee positions may be followed by additional measures, including tighter limits on banks’ positions and further curbs in the offshore currency market, according to Barclays Plc strategists. The move risks amplifying stress beyond bonds into broader funding markets, complicating the government’s ability to carry out its record borrowing for the new fiscal year that began Wednesday.
“The RBI starting to take sharp administrative measures to curb speculation in the rupee could be the first clear sign that the monetary policy reaction-function is changing and that policy communication is likely to undergo a material shift,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership Ltd.
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The unease is visible in the swaps market. Traders are now pricing in a full rate hike, along with tighter liquidity, as soon as next week’s policy meeting. The three-month overnight indexed swap rate jumped 17 basis points on Monday — its biggest rise in nearly four years — to 5.72%, nearly 50 basis points above the RBI’s benchmark rate of 5.25%.
The market is concerned over whether the RBI could tilt toward tighter policy, given the rising inflation risks, said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank Ltd. Although he does not expect policy rates to be raised next week, tighter banking liquidity would have the same effect.
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