Indian federal bond yields and swap rates spiked on Friday as a surge in March headline inflation spooked investors and raised expectations of aggressive rate increases by the central bank. The wholesale price index surged to nearly 9 percent in March, far above forecasts, on higher fuel and manufacturing prices, adding pressure on the Reserve Bank of India (RBI) to take bolder action despite raising interest rates eight times since March 2010.
The benchmark five-year swap rate closed at 8.19 percent, up 10 basis points, while the one-year rate closed 19 basis points higher at 7.70 percent. The yield on the most-actively traded 8.08 percent 2022 bond closed 3 basis points higher at 8.24 percent, while the 7.80 percent 2021 bond ended up 6 basis points at 7.99 percent.
On the week, the 10-year bond jumped 13 basis points while the most-traded 2022 bond rose 12 basis points. Total volume on the central bank's electronic trading platform was a low 53.35 billion rupees ($1.2 billion), compared with 90 billion to 100 billion rupees usually traded in a day.
"Chances of a decisive action by the central bank cannot be ruled out after such a print," said Manish Wadhawan, director and head of rates at HSBC in Mumbai. Traders said they expect the RBI's annual policy statement to be more hawkish but were unsure whether it would hike key rates by a bolder 50 basis points given its calibrated tightening stance.
A thin section of the market, however, is anticipating an off-cycle move ahead of the May 3 policy or the possibility of a 50 basis points hike in May. "I think 5-year OIS can touch 8.35 percent soon. I don't think there could be a mid-policy rate hike but I expect the RBI to be very hawkish on May 3," said Vivek Rajpal, interest rate strategist at Nomura.
Traders said the swaps curve was likely to move higher across tenors in coming weeks. The bearish undertone in the bond market was also reflected in cut-offs set at today's $2.7 billion debt sale, dealers said.
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