Indian bond yields fall as central bank policy minutes seen dovish

MUMBAI: Indian government bond yields fell in early trades on Monday, as the minutes of the latest monetary policy meeting were interpreted to be softer in guidance, cooling fears of aggressive rate hikes.

However, higher US Treasury yields prevented a steeper fall in yields.

The benchmark Indian 10-year government bond yield was at 7.4239% as of 0440 GMT.

The yield ended at 7.4696% on Friday and had risen 30 basis points in last five weeks.

“The dovish turn from the external members will force the central bank officials to also consider that line of thinking when it meets next,” a trader with a state-run bank said.

The Reserve Bank of India’s Monetary Policy Committee (MPC) may lean more on data in deciding the key interest rate going ahead even as policymakers appeared divided on the future path of rate hikes, minutes of its September meeting suggested on Friday.

Indian bond yields may open higher as jump in inflation subdues sentiment

Two external members, Ashima Goyal and Jayant Varma, showed their preference for a tapering of the rate-hike cycle going ahead.

“A pause is needed after this hike because monetary policy acts with lags,” Varma wrote in his minutes.

The MPC raised the benchmark repo rate by 50 basis points in September, the fourth straight increase to tame stubbornly high inflation.

Retail inflation accelerated to a five-month high of 7.41% in September, its ninth straight reading above target. Nomura said the minutes signal “some probability” that MPC may choose to undertake final rate hike in December and then pause.

Meanwhile, Barclays expected a case for further rate tightening but possibly less than 50 bps. “We now expect the RBI to deliver a 35 bps rate hike at the December MPC to bring the repo rate to 6.25%, before shifting to a neutral stance,” chief India economist Rahul Bajoria said.

QuantEco Research also expected another 35 bps rate hike before the central bank turns reactive rather than proactive, they said.

Kotak Mahindra Bank said the minutes have restated the view for softer rate hikes given uncertainties emanating from the global outlook.

Meanwhile, US yields rose, with the 10-year yield staying above the 4.00% mark, as elevated inflation raised market expectations that the Federal Reserve’s target interest rate will peak in 2023 close to 5%.

The US Fed fund futures are pricing in two more 75 basis points rate hikes in November and December, on top of the 300 bps hikes since March.