A hawkish tone in the Reserve Bank of India's policy minutes jolted domestic bonds on Thursday, compounding pressure from rising oil prices and knocking the liquid 10-year benchmark to a two-month low.
The yield on the benchmark 6.94% 2036 bond climbed 5 basis points to 6.8709%, its highest since June 15. Bond yields move inversely to prices.
RBI minutes released on Wednesday showed policymakers were more prepared to raise rates if inflation risks materialise, with concerns mounting over higher food, fuel and input costs feeding into broader price pressures.
Governor Sanjay Malhotra said that evidence of such spillovers could warrant "policy tightening." The comments accelerated the bond selloff by reviving expectations of higher borrowing costs.
The MPC minutes showed a path being built to eventual hikes, Tanay Dalal, economist at Axis Bank, said.
"We continue to see hikes to a 6% neutral, with room for an October move opening. However, a December hike is far more likely," Dalal added.
Brent crude futures rose in Asian trade to $94 a barrel, extending gains for a fifth day.
India, the world's third-largest oil importer, is vulnerable to higher crude costs, which could stoke inflation and strain both the current account and government finances.
Retail inflation accelerated to 4.45% in July, above the RBI's 4% medium-term target. The U.S. 10-year yield also surged in Asian trade to 4.67%, adding pressure.
Globally, bond markets are entering an era where the inflation and interest rate outlook is more uncertain and the upside risks are greater, with Washington's tariffs, mounting debt and the war on Iran upending the global order.
Efforts to end the Middle East conflict also remained stalled on Thursday.
RATES
India's overnight indexed swap rates surged sharply on rising rate hike bets.
The one-year swap rate jumped 12.75 bps to 5.9350%, while the two-year rate rose 11.5 bps to 6.1650%. The liquid five-year rate ended 6.75 bps higher at 6.4750%.
