India 10-Year Bond Yield Rises To 7.25% After RBI Repo Rate Hike

Government bond yields moved higher on Wednesday after the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) raised the repo rate and unexpectedly shifted its policy stance to calibrated tightening.

The yield on the benchmark 10-year government bond climbed to 7.25% from its previous close of 7.19%.

The MPC increased the repo rate by 25 basis points to 5.50%. RBI Governor Sanjay Malhotra said near-term rate cuts were off the table, with future policy action limited to either another rate increase or a pause depending on inflation and growth.

RBI raises FY27 inflation forecast

Malhotra said the inflation outlook was no longer as benign as last year. Headline consumer price index (CPI) inflation is expected to average nearly 5.8% over the next three quarters, while core inflation is projected at 4.4% for FY27.

The RBI raised its FY27 CPI inflation forecast to 5.2%. Inflation is projected at 4.9% in Q2, 6% in Q3 and 5.7% in Q4, before easing to 5.6% in Q1 FY28.

The central bank expects inflation risks from deficient monsoon conditions, El Niño and volatile international oil prices. It also noted early indications of broader price pressures across the CPI basket.

RBI flags risks to current account deficit

On the external sector, the RBI said India's current account deficit (CAD) remained modest despite global pressures.

The CAD stood at 0.5% of GDP, or $4.2 billion, in Q1 FY27, compared with 0.4% a year earlier. However, the merchandise trade deficit widened during July-August, largely due to higher crude oil and electronic goods imports.

Moderating global trade, elevated energy prices and trade policy uncertainty could put pressure on the CAD. However, strong services exports, remittances and bilateral trade agreements are expected to provide support.

The services trade surplus reached $85.8 billion during April-August, while net transfers, mainly worker remittances, stood at $53.9 billion during April-July.

The RBI expects a healthy balance of payments surplus in FY27, with foreign exchange reserves providing import cover of around 11 months.