India’s fight to stabilize the rupee is starting to exact a price in the bond market, as traders ramp up bets on faster interest-rate hikes.
The 10-year government bond yield may hit 7.5% as soon as this month, according to analysts at Ujjivan Small Finance Bank and IDFC First Bank — extending its climb from 7.4% on Wednesday, the highest since March 2023.
The selloff highlights the trade-off facing the Reserve Bank of India after its boldest effort in more than a decade to support the rupee. The central bank has rolled out measures to curb dollar demand, including a special window to supply foreign currency to state-run oil refiners. But with elevated oil prices and foreign outflows persisting, traders are betting the RBI will need to rely more on rate hikes, which tend to push bond prices down and yields higher.
“The market is pricing in faster rate hikes after the RBI’s recent currency measures, which is signaling their resolve toward ensuring an orderly rupee,” said Rajeev Pawar, head of treasury at Ujjivan. Traders now see a greater chance of a 50-basis-point hike in December, weighing on bonds, he added.
Those expectations were reinforced by Governor Sanjay Malhotra’s comments Tuesday that the RBI was prepared to take further steps if needed to curb speculation in the foreign-exchange market. It raised rates earlier this month for the first time in nearly four years and signaled more may follow.