Rising India bond yields precede debt sale, driven by Federal Reserve's influence on sentiment
The Federal Reserve, led by Chair Jerome Powell, has announced that it will be in a 'meeting-by-meeting situation' regarding the rate cut outlook for the USA, signaling a cautious approach to monetary policy. This comes after the Federal Reserve reduced interest rates on Wednesday, marking the first rate cut for the USA since December.
However, the hawkish policy decision by the Federal Reserve has had an impact on the U.S. Treasury yields. The yield on the 10-year U.S. Treasury note climbed 4 basis points to 6.5139%, while the two-year OIS rate advanced by 2 bps, ending at 5.44%. The one-year OIS rate also followed suit, ending 2 bps higher at 5.47%.
Meanwhile, in India, the central bank has been considering suggestions to reduce the share of ultra-long bonds and cut weekly auction sizes, as revealed in a round of consultations with market participants earlier this month. This move is aimed at improving liquidity in the Indian bond market.
The Indian government bond yield ended at its highest level in two weeks on Thursday, with the benchmark yield climbing. The 300 billion rupees ($3.4 billion) of the 10-year bond will be sold by New Delhi on Friday. Traders in India are eagerly awaiting the borrowing calendar for the second half of the fiscal year, which is expected to be published before the end of September.
The hawkish commentary from the Federal Reserve has also had an impact on India's bond market, with the Federal Reserve's hawkish stance outweighing rate cut bets. Madhavi Arora, chief economist at Emkay Global Financial Services, stated that the more dovish forward-looking median forecast was downplayed by the hawkish presser.
Looking ahead, the odds of an additional 50 bps of rate cuts in 2025 for India have risen to 82%, up from 74%. This increase suggests that the Indian central bank may be more open to further rate cuts in the future.
Lastly, it's worth noting that the cuts by the Federal Reserve last year were considered risk management cuts, which opens the possibility that the current cycle could end after only a handful of cuts. However, the specifics of the Indian central bank's expenditure budget for September this year remain unknown, as the name of the person who prepared the budget has not been disclosed in the available information.
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