RBI's first rate hike in years and liquidity drain push bond yields up
Inflation accelerates, building rate-hike pressure India's August consumer inflation rose to 4.82%, the highest since the calculation method changed, with price pressures spreading beyond food and transport. This strengthened expectations that the RBI would raise interest rates, pushing bond yields up and prices down.
Rising inflation is the root cause of the rate hike and directly pressures bond prices lower.
RBI drains 1 trillion rupees of liquidity The RBI announced it would sell 1 trillion rupees of government bonds to drain excess cash from the banking system. This added supply of bonds and tighter liquidity pushed yields higher, with the 10-year yield rising sharply.
This liquidity withdrawal directly increases bond supply and reduces demand, pushing yields up.
RBI hikes repo rate to 5.5%, signals gradual tightening The RBI raised its key repo rate by 0.25% to 5.50%, its first hike in about four years, and shifted its stance to gradual tightening. It expects inflation to stay above target, and a rate cut is not an option soon. This pushes bond yields up and prices down.
The rate hike is the main event that directly raises yields and lowers bond prices.
Cooling US jobs data may limit yield rise US jobs growth slowed sharply in September, raising the odds the Federal Reserve will hold rates steady. This eased some pressure on the Indian rupee and could soften the rise in Indian bond yields, though the effect is smaller than domestic factors.
This is a counterweight that could partially offset the upward pressure on Indian bond yields.