RBI Expected to Kick-Start Monetary Tightening Cycle in October

The Reserve Bank of India (RBI) is expected to start a tightening cycle in its October Monetary Policy Committee (MPC) meeting, as inflation risks and stronger-than-expected economic growth have shifted market sentiment.

With the US Federal Reserve and European Central Bank having already initiated monetary tightening, Indian bond yields are likely to follow suit. The RBI's latest bulletin notes that India's financial and external sectors are benefiting from real economy growth, but geopolitical tensions and weather-related uncertainties pose risks.

The sharp increase in oil prices due to West Asia conflicts has reignited inflation fears, with the RBI stating that 'India's financial and external sectors are drawing strength from the real economy.' The central bank also acknowledges pressure on government finances from rising sovereign yields in major advanced economies.

Emerging markets like India must now offer higher yields to attract global investors, who are drawn to ultra-safe assets such as US Treasuries. This has led to a rate hike speculation, with India's benchmark 10-year bond yield reaching a four-month high of 7.1194% on September 25.