FX.co ★ India 10Y Yield Hits 3-Year High

The yield on India’s 10-year government security climbed more than 1% to 7.38%, its highest level in over three years, as the Reserve Bank of India’s liquidity-tightening measures and hawkish policy stance intensified selling. The central bank plans to sell INR 250 billion of bonds on Tuesday and will increase banks’ daily cash reserve requirement to 99% of the prescribed level, up from 90%, effective October 16. In addition, its foreign-exchange operations are expected to further drain rupee liquidity.

The RBI’s recent 25-basis-point rate hike, along with indications of further tightening, has led mutual funds to pare exposure to longer-dated government securities. They recorded net sales of INR 378 billion in July–September and an additional INR 51 billion over the three sessions following the rate increase. At the same time, Brent crude trading above USD 100 per barrel and expectations that September inflation will rise to 5.4% year-on-year have heightened concerns about persistent price pressures.