India bonds extend weekly slide as RBI rate hike and high oil prices rattle markets

Indian government bonds have fell for an eighth consecutive week. Investor confidence has buckled under the dual pressure of a hawkish shift by the central bank and persistently high global oil prices, pushing benchmark yields to fresh highs.

On Friday, the yield on the benchmark 6.94% 2036 bond ended at 7.2994%, up from Thursday's close of 7.2868%. Over the week, the yield climbed nine basis points. That adds to a cumulative 45-basis-point rise over the previous seven weeks, marking a prolonged slide that began in mid-August.

Why the bond market is sliding

The immediate trigger for the sell-off was the Reserve Bank of India's monetary policy committee decision to raise the repo rate by 25 basis points to 5.50%. This was the central bank's first rate increase since February 2023.

Crucially, the central bank also shifted its policy stance from neutral to "calibrated tightening". By doing so, the RBI signalled that further rate hikes are firmly on the table as it tries to keep a lid on domestic price pressures.

Economists expect the rate-hiking cycle to continue. Most analysts now predict India's terminal repo rate will reach at least 6.00%, while Standard Chartered Bank and Goldman Sachs have forecast a peak of 6.25%. Lavanya Venkateswaran, executive director and senior ASEAN and India economist at OCBC Bank, said the hawkish turn was in line with expectations as inflation builds. She added that OCBC expects another 25-basis-point hike by March 2027, with the risks tilted toward even more increases.

Oil and inflation risks linger

Adding to the bond market's worries is the volatile state of global energy markets. Brent crude climbed above $105 a barrel this week following escalating attacks on shipping vessels in key transit lanes.

Prices did ease slightly after US President Donald Trump stated that Washington was holding productive discussions with Iran. However, high oil prices remain a major threat to India, which relies heavily on imports to meet its energy needs. Rising fuel costs threaten to disrupt government finances and push headline inflation above the central bank's comfort levels.

Market participants are now waiting for India's consumer and wholesale inflation readings for September, due on 12 and 14 October respectively, to gauge the immediate trajectory of domestic prices.

Fragile relief for equities

In contrast to the bond market, Indian equities managed to break their own eight-week losing streak, though analysts warned the rebound remains fragile. The Nifty 50 rose 1.30% on Friday to end at 22,520.45, while the Sensex gained 1.23% to close at 72,472.33. Over the week, their gains were a more modest 0.43% and 0.78% respectively.

While the RBI upgraded its economic growth forecast for the 2027 financial year to 7.1%, it also raised its inflation projection to 5.2%. This combination of stronger growth but higher borrowing costs leaves businesses facing tougher financing conditions. Sectors sensitive to interest rates, such as real estate, automotive, and consumer durables, are expected to face near-term pressure.