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RBI to Sell 1 Trillion Rupees of Bonds to Drain Liquidity, Pushing Indian Bond Yields Higher
The Reserve Bank of India announced a plan to sell 1 trillion rupees of government bonds, or about 10.5 billion dollars, to drain excess liquidity from the banking system. It is the RBI's most aggressive measure to date, sending Indian government bonds lower and yields higher. The bond with a 6.94% coupon maturing in 2036 rose 7 basis points to 7.09%, while the bond with a 6.36% coupon maturing in 2031 jumped 16 basis points to 6.78%, after Indian markets reopened on Tuesday. The bond sale will be conducted in three rounds, with the first set for September 17, when the central bank will sell bonds with about 3 to 6 years of remaining maturity. Pressure is also building from the Indian central government's borrowing plan through nearly 8 trillion rupees of bond issuance over the next six months, compounded by high oil prices and August inflation that moved closer to the upper end of the 2-6% target range. Citigroup expects the RBI may raise interest rates by a total of 50 to 75 basis points, with the hiking cycle possibly beginning as early as next month. VRC Reddy, head of treasury at Karur Vysya Bank, said 5-year bonds have been particularly hard hit and expects India's yield curve to steepen, with the spread between 5-year and 10-year bond yields likely holding at around 20 to 30 basis points.
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India's August CPI accelerates to 4.82% year-on-year, strengthening expectations of a rate hike next month
India's August consumer price index, released by the government on the 14th, rose 4.82% year-on-year, the highest since the calculation method was changed in January. It slightly exceeded the 4.80% rise forecast by economists in a Reuters poll and accelerated from the previous month's 4.45% gain. Price pressures spread beyond food and transport, strengthening expectations that the Reserve Bank of India will raise rates as early as next month. The central bank last month left the repurchase rate, its key policy rate, unchanged at 5.25%, but according to the minutes of its previous monetary policy meeting, some central bank officials, including Governor Malhotra, indicated they would support a rate hike if inflation broadened across sectors. Aditi Nayar, chief economist at ratings agency ICRA, said that under the base scenario, if there is evidence of a broad-based build-up in inflationary pressures and crude oil prices remain elevated, a rate hike at the December meeting is possible. The previous rate increase was in February 2023. According to Sakshi Gupta, principal economist at HDFC Bank, core inflation, which excludes volatile food and fuel, stood at 4.2%, up from 3.86% in July.
Several RBI members hinted at possible rate hikes, minutes show
Minutes of the Reserve Bank of India's monetary policy committee meeting held on the 5th of this month show that several members hinted at the possibility of raising interest rates going forward. The committee kept the benchmark repo rate unchanged at 5.25 percent and maintained a neutral policy stance, but indicated it was watching for signs that supply-driven inflation may be spreading across the broader economy. Governor Malhotra said vigilance must not be relaxed because the risk of food and fuel price increases causing a broader rise in inflation persists, and monetary tightening may be needed if signs of those risks materialising emerge. Deputy Governor Gupta said there is no room for further monetary easing, and that grounds for a rate hike could in fact emerge during fiscal 2026. External member Ram Singh also expressed the view that policy should be adjusted quickly to protect macroeconomic stability if external shocks worsen.
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India's July CPI accelerates to 4.45% year on year; central bank rate outlook unchanged
India's consumer price index for July, released by the government on the 12th, rose 4.45% from a year earlier, accelerating on the back of higher food prices. The figure was broadly in line with the market forecast of a 4.5% increase and exceeded the central bank's medium-term target of 4% for a second straight month, but remained comfortably within the tolerated range of 2% to 6%. The central bank last week kept its policy rate unchanged and signalled it would wait for upcoming data to assess whether higher oil prices are adding to inflationary pressure. Alexandra Hermann Prasad, lead economist at Oxford Economics, noted that the central bank can afford to be patient for now, but not indefinitely, and expects policymakers to hold off on a rate hike in October before delivering a 25 basis point increase in December. Food inflation rose to 5.52% in July from 5.32% in June, against the backdrop of deficient monsoon rainfall. According to India Ratings and Research, core inflation, which strips out volatile food and fuel prices, came in at 3.9%, below the expected 4.08%.
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Sensex surges over 300 points as oil prices fall and central bank holds rates
India's Sensex index closed more than 300 points higher, with the S&P BSE Sensex ending at 78,954.76, up 373.76 points or 0.48 percent, buoyed by falling oil prices and the Reserve Bank of India's widely expected decision to keep interest rates unchanged. Banking and energy stocks led the market gains.
India's central bank holds rate at 5.25% as expected, raises GDP forecast to 6.7%
The Reserve Bank of India unanimously decided to keep the policy rate at 5.25% at its meeting today, while maintaining a neutral monetary policy stance. All six members of the Monetary Policy Committee voted in favor. The central bank also raised its GDP growth forecast for the current fiscal year to 6.7% from 6.6%, and lowered its average inflation forecast to 5% from 5.1%. The core inflation forecast was cut sharply to 4.3% from 4.7%. RBI Governor said headline inflation has risen above target due to higher fuel prices, but overall price pressures remain under control, and the RBI will not rush into any action until there is more clarity on the inflation situation.
India