India’s 10-year bond yield is moving back towards 7% as Brent crude stays above $110 and markets price tighter policy. The Overnight Indexed Swap market has shifted, with the 1-year gauge pointing to a near reversal of rate cuts made over the past year.
Real economy data has remained resilient, with industrial production and Purchasing Managers’ Index (PMI) readings holding up despite supply shocks. The Reserve Bank of India has indicated it may look through temporary price pressures if second-round effects are limited and core inflation stays anchored.
Monsoon Risks And Currency Pressure
The India Meteorological Department has forecast deficient rainfall this summer, which may raise ex-cereal food inflation. The Indian rupee has given up gains linked to net open position changes and has returned to a gradual depreciation bias towards the mid-94 level.
The currency has also faced headwinds from a subdued outlook for portfolio flows, alongside counter intervention bids. INR assets are seen as vulnerable to volatility and downside risks until there are clearer signs of a resolution to the US–Iran conflict.
The Indian 10-year bond yield is currently firming around 7.35%, reflecting persistent concerns about inflation. Although Brent crude has moderated to about $88 per barrel, this level is still high enough to exert upward pressure on domestic prices and import costs. This suggests that positions in interest rate futures should be managed for a continued rise in yields.
We see the Overnight Indexed Swap (OIS) market is pricing in the possibility of further rate hikes from the Reserve Bank of India, despite the repo rate already standing at 6.75%. March’s headline inflation print of 5.1% remains well above the RBI’s 4% target, giving the central bank little room to soften its stance. Therefore, swap traders should anticipate a hawkish tone from the monetary policy committee in its upcoming meetings.
Growth Resilience And Policy Implications
Underpinning the case for tighter policy is the surprising strength in the real economy. The latest manufacturing PMI reading for March came in strong at 58.5, suggesting the economy can absorb higher borrowing costs without a significant slowdown. This resilience means traders should not expect any growth-related dovish pivot from the RBI soon.
When we look back at the forecasts from 2022-2023, the long-term depreciating bias for the rupee has materialized, with the INR now trading near 84.50 against the dollar. This weakness is driven by a strong dollar globally and sustained, though moderate, portfolio outflows from Indian assets. Derivative traders should consider using options to hedge against increased volatility, as the RBI’s interventions will likely only smooth the decline rather than reverse it.
