Benchmark 10-Year Bond Yield Nears 7.30% as Indian Gilts Drop for Eighth Straight Week on RBI Tightening

Indian government debt logged its eighth consecutive week of declines on Friday, as market participants struggled to absorb the Reserve Bank of India's (RBI) first interest rate hike in nearly four years alongside a definitive turn toward tighter policy.

The benchmark 6.94% 2036 bond yield closed at 7.2994%, up from 7.2868% on Thursday. For the week, the 10-year yield climbed 9 basis points, building on a cumulative 45-basis-point increase recorded over the prior seven straight weeks since mid-August.

Policy Pivot Jolts Fixed-Income Markets

The debt rout intensified after the Monetary Policy Committee delivered a 25-basis-point rate hike, raising the benchmark repo rate to 5.50%. More significantly, the central bank abandoned its neutral stance in favor of "calibrated tightening," signaling that subsequent adjustments would strictly be rate pauses or further increases.

RBI Governor Sanjay Malhotra also emphasized that the central bank was actively keeping options open to manage surplus system cash, noting that even a hike in the Cash Reserve Ratio (CRR) could not be entirely ruled out as banking surplus liquidity is projected to diminish toward the end of the financial year.

Economists and market participants moved swiftly to reprice their expectations for India's policy trajectory:

• Most analysts and domestic treasury desks now expect the terminal repo rate to reach at least 6.00%.
• Global brokerages Standard Chartered Bank and Goldman Sachs revised their terminal rate forecasts higher to 6.25%.
• OCBC Bank projected at least another 25-basis-point hike through March 2027, highlighting that balance of risks remains tilted toward additional rate increases.

Crude Oil Pressures Add to Inflation Concerns

Compounding the central bank's hawkish tone, international crude oil prices remained elevated, with Brent crude briefly climbing above $105 a barrel during the week following maritime disruptions before stabilizing slightly.

Because India imports more than 80% of its petroleum needs, sustained crude prices above $100 per barrel pose an immediate threat to the domestic inflation outlook and current account dynamics. Fixed-income traders noted that rising input costs increase the probability that headline inflation could remain sticky, limiting the scope for any early policy relief.

Swaps and Liquidity Dynamics

The shift in monetary expectations also left its mark across overnight indexed swap (OIS) curves:

• The 1-year OIS rate settled at 6.24%.
• The 2-year OIS rate ended at 6.44%.
• The liquid 5-year OIS rate closed at 6.7250%.

The RBI's earlier balance-sheet actions have already weighed on market liquidity, with the central bank selling approximately ₹1 trillion ($10.35 billion) of bonds through open market operations last month—its largest debt offloading pace in over a decade.

With secondary bond supplies elevated and institutional buyers remaining defensive, analysts expect the 10-year benchmark yield to remain anchored between 7.25% and 7.50% over the remainder of the fiscal year, maintaining upward pressure on corporate borrowing yields and debt mutual fund returns.

Tags: Reserve Bank of India Indian Government Bonds Sanjay Malhotra 10-Year G-Sec Yield Brent Crude Fixed Income