Indian sovereign bonds declined sharply after the Reserve Bank of India announced plans to drain ₹1 lakh crore ($10.5 billion) in surplus banking system liquidity through note sales—the central bank's most aggressive intervention to date.
Yields on India's 6.94 percent bond due 2036 rose seven basis points to 7.09 percent. The 6.36 percent note due 2031 climbed 16 basis points to 6.78 percent, as domestic bonds participated in a broader global selloff.
The liquidity drain targets excess cash that poses inflationary risks. India's inflation moved closer to the upper limit of the central bank's 2-6 percent target range in August, with high oil prices adding pressure.
The federal government has ₹8 lakh crore in borrowing scheduled over the next six months, alongside typical heavy provincial bond sales. This supply surge coincides with the RBI's absorption effort, creating compounded downward pressure on bond valuations.
VRC Reddy, head of treasury at Karur Vysya Bank Ltd. called the RBI's move "the most stringent action the RBI has taken so far," noting that "the logical casualty has been the five-year segment, which was richly valued." Reddy expects the yield curve to steepen further as short-end yields climb, with the gap between five- and 10-year yields potentially stabilizing around 20-30 basis points.
Citigroup Inc. anticipates the RBI will raise borrowing costs by 50-75 basis points beginning next month, aligning with market expectations for a hawkish pivot.
The RBI will conduct bond sales in three tranches, with the initial auction scheduled for September 17, offering notes with maturities ranging from approximately three to six years.
