India Faces Global Rate Shock Without Immediate RBI Hike
Global bond yields are on the rise again, but India's policy rate has not followed suit. The US Federal Reserve is due to announce its decision on September 16, while the Bank of Japan is expected to consider another increase at its September 17-18 meeting. Meanwhile, India's 10-year government bond yield has moved above 7%, with the RBI keeping its repo rate unchanged at 5.25% in August.
The unusual part is that India's policy repo rate remains lower than global central banks. The ECB raised all three key rates by 25 basis points on September 10, taking the deposit facility rate to 2.50%. This has put pressure on domestic financial conditions, with investors facing a different rate environment from earlier this year.
India's bond market is already sending a warning signal, with the benchmark 10-year government bond yield reaching about 7.035% on September 11. However, this does not automatically mean an RBI hike is next. Long-term yields price several factors at once, including inflation expectations, government borrowing supply, crude oil, currency risk, global benchmark yields, and expectations for future monetary policy.
The RBI can make financial conditions tighter without changing the repo rate. Liquidity operations influence money-market conditions, while government-bond sales can affect the supply-demand balance in the securities market. The RBI has announced ₹1 lakh crore of open-market sales of government securities to absorb excess liquidity from the banking system.