Global Financial Dynamics: U.S. Yields Surge, Prompting Noticeable Rise in Indian Bond Yields
Expectations of U.S. Interest Rate Cuts Ease, Impacting Indian Government Bond Yields
In the early hours of Wednesday, there was a slight rise in Indian government bond yields influenced by a change in U.S. yields. This shift occurred as hopes for aggressive rate cuts from the U.S. Federal Reserve diminished following careful remarks from a central bank official.
As of 10:00 a.m. IST, the benchmark 10-year yield in India was at 7.1504%, a small increase from its previous close at 7.1460%. Analysts suggest that Indian bond yields are likely to closely follow movements in U.S. Treasuries. Significant local changes may not happen until the 10-year yield drops below the 4% level, according to a trader from a state-run bank.
The turnaround in U.S. bond yields on Tuesday, ending a recent positive trend, was linked to resistance against expectations of aggressive interest rate cuts. Federal Reserve Governor Christopher Waller's cautious comments played a crucial role, emphasizing that the U.S. is nearing the Fed's 2% inflation goal. However, Waller stressed the need for caution in implementing rate cuts until it is clear that lower inflation is sustainable.
Waller's statements are noteworthy, given that his views in November had sparked discussions about a potential policy shift from the Fed. The 10-year U.S. yield surged to 4.08% on Tuesday and remained around the 4.05% mark in Asian hours on Wednesday. At the same time, the likelihood of a Fed rate cut in March decreased to nearly 67% from 81% on Friday, according to the CME FedWatch Tool.
Earlier in the week, local bond yields in India had eased following a decline in the country's core inflation in December. Economists suggest that if inflation continues to fall, the Reserve Bank of India (RBI) might consider shifting its policy stance to 'neutral' as early as the next month. The RBI has maintained steady rates since April 2023, following a 250 bps increase in the previous financial year.
Traders are also expecting a new supply of debt as New Delhi plans to raise 350 billion rupees ($4.21 billion) through a bond sale on Friday. Additionally, the central bank is set to auction Treasury bills worth 270 billion rupees later in the day.
