The Reserve Bank of India moved to pull cash out of the system, selling 500 billion rupees of government securities in the 2029 to 2032 bucket under its open market operations. Pricing cleared between 102.25 rupees and 105.63 rupees, a range that lined up with estimates from a market survey. The step followed excess bank liquidity swelling to an unprecedented 11 trillion rupees earlier this month.
Bond yields firmed after the results. The five-year yield rose up to 6 basis points to 6.83%, while the benchmark 10-year advanced as much as three basis points. The RBI's recent measures have already nudged sovereign yields higher since last week, lifting borrowing costs more broadly across the economy. Traders are also digesting the US Federal Reserve's first rate hike in more than three years, with India's own policy review set for Oct. 7.
RBL Bank Ltd.'s head of domestic markets, Sagar Shah, said the following: "There is a global theme of bear-flattening playing out as short-end yields rise faster than long-term yields, and India is following that trend," "The US has already hiked rates, but in India we are heading into an RBI policy, with expectations of rate hikes and more liquidity-draining measures."
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Short-dated yields tend to react most to changes in system liquidity. Over the past few months, buying by banks has driven gains in India's five-year bonds, helped by hefty money coming in through the RBI's diaspora deposit program. The central bank's latest debt sales are its strongest step so far to absorb that extra cash, which is compounding inflation risks from elevated oil prices. The effort also means more bond supply in a year when government borrowing is already at a record.
Thursday's deal kicks off a 1 trillion rupee ($10.5 billion) mop-up, with the next two tranches due on Sept. 21 and Sept. 28. Analysts see the 10-year yield potentially climbing to as high as 7.25% from about 7.07% now, a move that would top the 2026 peak reached in May and mark a three-year high. If that path holds, financing could get pricier for everything from home loans to corporate debt.
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