Bond yields spike, hawkish Fed raises bets of 50 bps RBI rate hike

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MUMBAI — Indian government bond yields jumped on Thursday as the U.S. Federal Reserve raised interest rates and signaled more increases, likely prompting an aggressive rate hike by the Reserve Bank of India next week.

The benchmark Indian 10-year government bond yield ended at 7.3118% after closing at 7.2326% on Wednesday. The yield has risen 20 basis points in last seven sessions.

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“The narrative of terminal repo rate in India has suddenly shifted to 6.50% from 6.00% in a matter of a few days, which is leading to excessive selling pressure as bond yields get adjusted,” said Nandan Pradhan, deputy general manager, treasury, at Cosmos Bank.

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The RBI’s policy decision is due on Sept. 30, with most market participants expecting it to hike rates by 50 bps.

The central bank has raised interest rates by an aggregate 140 basis points between May and August, with economists now assessing the possibility of terminal repo rate in 6.25%-6.50% band.

India’s headline retail inflation has remained above the central bank’s tolerance band for eight months. Deutsche Bank expects September inflation reading to rise to 7.4% from 7% in the previous month.

The U.S. Treasury yield curve inversion deepened further, as Fed raised rates by 75 basis points and Chair Jerome Powell said central bank officials were “strongly resolved” to bringing down inflation from four-decade highs and “will keep at it until the job is done.”

On Wednesday, the benchmark 10-year U.S. Treasury yield jumped to 3.64%, its highest level since 2011, while the two-year yield hit a fresh 15-year high of 4.13% on Thursday.

The Fed fund futures were pricing in a near 70% probability of a fourth straight 75-bps hike in November. The Fed has raised rates by 300 bps since March.

Market participants will also watch out for banking system liquidity which slipped into deficit for the first time in more than three years, this week. (Reporting by Dharamraj Lalit Dhutia; Editing by Dhanya Ann Thoppil)

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