The yield on India’s 10-year government security (G-Sec) has climbed to around 7.1%, its highest level in more than four months, as a sharp selloff in US Treasuries and expectations of further liquidity tightening by the Reserve Bank of India (RBI) put additional upward pressure on domestic bond yields.
Market participants pointed to the jump in US yields following stronger-than-expected economic data, which has rekindled concerns about inflation. At the same time, Brent crude has risen back above $100 per barrel, intensifying domestic inflation risks and bolstering expectations that the RBI may deliver another rate hike at its October policy meeting.
In parallel, the RBI has reportedly executed at least $10 billion in sell-buy foreign exchange swaps in recent weeks to withdraw excess rupee liquidity from the banking system. Surplus liquidity had earlier this month reached a record INR 11 trillion. The central bank’s sustained efforts to absorb this excess cash are likely to keep domestic borrowing costs elevated in the near term.
