India rates sold off across the curve yesterday, with OIS bearing the brunt of the move. In the G-sec market, weakness was concentrated in the belly and long end, resulting in a steeper IGB curve. We see three key drivers behind the move.
First, the borrowing calendar shifts supply pressure to the long end. The H2 FY27 borrowing calendar revealed a notable compositional shift in issuance, with borrowing reduced at belly maturities and redirected towards longer tenors. This takes some pressure off the belly of the curve, which has borne the brunt of the recent OMO sales. The move prompted investors to reassess long-end supply risk, resulting in pronounced underperformance in duration, with the 30Y G-sec yield rising around 8bp.
Second, the final OMO tranche reinforced supply concerns. Yesterday’s OMO sale marks the third and final tranche of the current programme. While the auction itself was reasonably fine, it reinforces the broader liquidity-drain narrative. With system liquidity surplus still around INR4.5tn, markets remain alert to the possibility of further RBI withdrawal operations, keeping supply-related concerns elevated.
Third, markets price a more aggressive RBI tightening path. Expectations for the October meeting increased from around +28bp at the end of last week to +35bp of tightening yesterday. The repricing probably reflects a combination of persistent oil risks, with the US-Iran impasse keeping crude above USD100/b, and continued UST selloff, with Treasury yields near multi-year highs.
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