The Reserve Bank of India’s (RBI) decision to raise interest rates by 25 basis points to 5.5% has sparked a negative reaction in the Indian bond market, with yields climbing to 7.27%. This marks the RBI’s first rate hike in nearly four years, driven by mounting inflation concerns.
After the announcement, the yield on India’s 10-year bonds rose by 5 basis points, reaching 7.27%. This is an 8 basis point increase from the previous day’s close of 7.19%. The Indian rupee also weakened, falling 11 paise to 96.54 per dollar.
Experts link the currency market’s muted response to the RBI’s assertive tone. Harshal Dasani, business head at INVasset PMS, found the market’s reaction to the rate hike surprising, indicating that the RBI’s statement was seen as more hawkish than the actual policy change.
Dasani added that the bond market’s view of inflation suggests a longer cycle than the two hikes initially expected. The RBI’s focus on measured tightening, along with a liquidity surplus of nearly ₹10 trillion, points to possible draining actions. These could negatively affect both short-term and long-term market rates.
Read Also: Private bank stocks surge ahead of RBI policy decision
Varoon Naidu, Co-Founder of Capital Stack, argues that the bond market has already tightened significantly. He believes future yield changes will depend more on market expectations of the terminal repo rate and the RBI’s liquidity management, rather than the recent 25 basis point increase.
Besides raising rates, the RBI hinted at future hikes by changing its stance from “neutral” to “calibrated tightening.” RBI Governor Sanjay Malhotra stressed that further changes would rely on actual inflation and growth data.
The RBI now forecasts inflation at 5.2%, up from 5%. Core inflation is expected to reach 4.4%, compared to 4.3%. The rate hike was unanimously approved by the six-member panel, matching a Business Standard poll predicting a 25 basis point rise.
