India 10-year yield sees biggest jump in 14 mths after RBI’s bond sale shock

By Bhakti Tambe and Dharamraj Dhutia

MUMBAI (Reuters) -Indian government bond yields soared on Friday, with the benchmark 10-year yield posting its biggest single-day jump in 14 months after the Reserve Bank of India surprised markets with its intention to conduct open market sale of bonds via auctions.

The 10-year benchmark bond yield closed at 7.3412%, the highest level since March 23, after ending at 7.2140% in the previous session. The yield had risen to 7.3612% earlier in the day.

The yield posted its biggest single session rise since August 5, 2022, and jumped 13 basis points this week, biggest such rise since week ended May 6, 2022.

“Market was not expecting announcement of a blunt tool like open market sale of bonds, which led to a strong reaction and even from this point, we see more upside for bond yields, with the trading range also shifting upwards,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

The RBI kept its key repo rate unchanged for a fourth consecutive policy meeting on Friday, which was on expected lines, and said it plans to conduct open market sale of bonds though auctions to manage liquidity in the system.

The RBI has sold bonds worth 71 billion rupees ($853.65 million) via screen-based operations in four weeks to Sept. 22, to drain additional liquidity since it started phasing out the incremental cash reserve ratio.

The central bank, however, did not provide a calendar for the sales, and uncertainty over the timing will dominate sentiment and keep yields elevated, economists said.

Overall, traders said the monetary policy tilted towards the hawkish side, with the RBI stressing on meeting its inflation target of 4% after it maintained its policy stance of “withdrawal of accommodation” to ensure inflation progressively aligns with the committee’s target.

ANZ Research said the RBI has a clear proclivity to manage liquidity via various tools, and liquidity will remain its preferred way to manage upside inflation risk, rather than tinkering with the policy rate.

(Reporting by Dharamraj DhutiaEditing by Sonia Cheema)