Traders started factoring a rate tightening in the third quarter following the unexpected hawkish minutes of the latest monetary policy review.
The yield jumped nearly 10 basis points during the week, making it the highest weekly rise this fiscal.
Indian government bonds encountered significant challenges this week, marking the worst week of the financial year. The Reserve Bank of India’s hawkish policy minutes triggered a selloff, compounded by the early closure of a diaspora-deposit hedging facility. Additionally, soaring crude oil prices heightened inflation concerns and rate hike fears in India, culminating in a notable increase in bond yields.
“The monetary policy appeared dovish. But it changed to hawkish after the minutes came out where MPC members spoke about the possibility of a rise in rates in December. On the global front, fresh escalation of the geopolitics also weighed on the sentiment,” said Karur Vysya Bank’s treasury head, VRC Reddy.
Domestic yields rose from the 6.75% lows seen before RBI’s decision to advance the FCNR-B deadline to August 31 prompted the market to shift from FCNR driven liquidity optimism to inflation and rate risk caution. The MPC minutes sound more hawkish than the policy day outcome, keeping the rate hike debate alive.
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“The FCNR liquidity boost is already largely priced in, particularly at the long end,” Reddy said.