Indian bond yields jumped on Tuesday as the Reserve Bank of India’s decision to sell government securities through open-market operations (OMOs) sparked concerns over additional supply, while rising crude oil prices and global bond yields added to the pressure.
The yield on the benchmark 10-year government bond ended at 7.07%, up five basis points from Friday’s close. Indian financial markets were shut on Monday on account of Ganesh Chaturthi.
The sell-off was sharper at the shorter end of the yield curve, with the five-year bond yield surging 21 basis points, its steepest single-day rise since May 2022.
Pressure spilled over into the currency market as well. The rupee weakened 40 paise to 95.96 against the US dollar on Tuesday as crude oil prices climbed to around $106 a barrel.
“The RBI’s open-market operation announcement, along with elevated global yields and persistent geopolitical concerns, weighed heavily on sentiment. If geopolitical tensions persist, yields could rise to around 7.15%,” said a trader at a primary dealership.
After market hours on Friday, the RBI announced the sale of Rs 1 lakh crore of government securities through OMOs to absorb excess liquidity following the mobilisation of FCNR(B) deposits. The sales will be conducted in three tranches, with the first scheduled for September 17. Banking-system liquidity stood at Rs 10.4 lakh crore as of Sunday.
The announcement has also raised expectations that the central bank may resort to further liquidity-tightening measures after assessing the impact of upcoming tax outflows.
“The OMO announcements, expectations of more liquidity-tightening measures and elevated inflation added to the pressure on the market today. They are likely to wait until tax outflows are absorbed before assessing their impact on liquidity. After that, there may still be room for one more measure. If liquidity reduces further, we will probably see a further jump in yields,” said the treasury head of a private sector bank.
Attention will now turn to the US Federal Reserve’s policy decision on Wednesday. According to the CME FedWatch Tool, markets are pricing in a probability of more than 90% of a 25-basis-point rate hike.
The rupee, meanwhile, is expected to remain under pressure as geopolitical tensions and elevated crude prices keep investors cautious. The currency has declined 1.2% over the past five sessions.
“The crude oil crisis has intensified, raising concerns about supply disruptions. At the same time, global bond yields have risen amid expectations of higher interest rates. These developments are largely external rather than domestic, leading the market to overlook several positive factors because of broader global concerns,” said Dilip Parmer, research analyst at HDFC Securities.
Parmer expects the rupee to remain under pressure if crude prices stay elevated and said it could weaken towards 96.30.