India’s bond market had its worst day in months on Wednesday. The 10-year government bond yield climbed to its highest level since March 2023, as traders priced in a real chance of another RBI rate hike in December. The selloff came a day after RBI Governor Sanjay Malhotra struck a hawkish tone in a media interview, and fresh data showed wholesale inflation running at a four-year high.
The benchmark 6.94% 2036 bond yield rose 3.5 basis points to close at 7.3999%, a more than three-year high, as investors pared their positions across the curve. It was the latest sign that the RBI’s recent moves to defend the rupee are starting to show up in the rates market.
What sparked the selloff
The trigger was the RBI Governor’s interview on Tuesday. Malhotra said the central bank does not generally use monetary policy to safeguard financial stability, but added that the two cannot be fully separated. Markets read it as a warning: the RBI may tolerate tighter financial conditions if inflation expectations need anchoring.
The bond selloff also reflects a growing view that the RBI’s rupee-defence measures have shifted pressure onto the rates curve. Since last week, the central bank has rolled out a string of steps to support the rupee, including routing oil companies’ dollar purchases through a special facility and imposing cash margins on FX hedges.
“The RBI’s recent steps have shifted the burden of defending the rupee onto the rates curve by widening the differential with US yields,” traders noted on Wednesday.
Inflation is the bigger worry
The harder numbers came from Wednesday’s inflation data. India’s wholesale inflation accelerated to 11.39% in September, the highest since September 2022, driven by rising food, manufactured goods, and fuel and power prices. Retail inflation had already climbed to 5.54%, and economists expect it to cross the RBI’s 6% upper tolerance limit in October.
Oil added to the pressure. Crude rose 0.8% on the day to $106 a barrel, but India’s landed cost is even higher. Kotak Neo’s Anindya Banerjee estimates India’s landed cost of crude at $130 to $140 a barrel, as freight, insurance and handling charges have roughly doubled for oil sourced outside the Gulf. For a country that imports most of its energy, every extra dollar of crude feeds the import bill, the rupee, and eventually consumer prices.
The RBI raised the repo rate by 25 basis points to 5.5% last week, its first hike in nearly four years, and shifted its stance to “calibrated tightening”. It also lifted its forecasts for FY2027, expecting CPI inflation of 5.2% (up from 5%) and GDP growth of 7.1% (up from 6.7%).
December hike now on the table
With inflation flirting with the upper limit of the RBI’s tolerance band, traders have raised their bets on a December rate hike. India’s overnight indexed swap rates surged on Wednesday as the market priced in tighter policy ahead of the December MPC meeting.
“With CPI inflation already closer to the RBI’s upper limit of tolerance, if that is breached in upcoming data, a rate hike in December 2026 MPC meeting would be inevitable,” said Payal V. Pandya, vice president, Bajaj Broking Prive.
The next big cues will come from the October inflation print and the December MPC review. US inflation data, due later on Wednesday, may also shape expectations on the Federal Reserve’s rate path, which in turn influences foreign flows into Indian bonds.
What it means for your money
- Home and car loans: bond yields are the benchmark for long-term borrowing costs. If yields stay near three-year highs, banks will find it harder to keep lending rates low, and fresh loans could get pricier.
- Fixed income investors: rising yields mean new bond and fixed-deposit offerings could come with better rates, but existing bond prices fall, so mark-to-market losses are possible.
- Stock market: higher rates raise the cost of capital for companies. Rate-sensitive sectors such as banking, real estate and autos tend to feel the squeeze first.
- The rupee: the currency has been trading in the 94 to 97 range against the dollar. A weaker rupee makes imported goods, from fuel to electronics, more expensive.
FAQs
Why did India’s 10-year bond yield rise?
Hawkish comments from the RBI Governor, September wholesale inflation of 11.39%, rising oil prices and growing expectations of a December rate hike combined to push the 10-year yield to a three-year high of 7.3999%.
What is the current repo rate?
The RBI raised the repo rate by 25 basis points to 5.5% last week, its first hike in nearly four years, with the stance set to “calibrated tightening”.
Will the RBI hike rates again in December?
Traders have increased their bets on a December hike. If retail inflation crosses the RBI’s 6% upper tolerance band in the October data, analysts say another hike would be very likely.
How does this affect my home loan EMI?
Higher bond yields push up banks’ borrowing costs. If the trend continues, floating-rate home loan EMIs could edge up over the coming months.
What should investors watch next?
The October CPI inflation print, the December MPC meeting, oil prices and US inflation data, which will shape expectations on both the RBI and the Federal Reserve.
For Informeia readers: markets move fast on inflation data and RBI signals. Follow our economy coverage for same-day analysis as the December policy meeting approaches.
