The INR rates market saw a volatile session yesterday, reflecting shifts in RBI's cues. The benchmark 10Y G-Sec initially rallied on the announcement of a 3-year USD/INR buy-sell swap auction scheduled for 26 May. The move was interpreted as supportive for domestic liquidity conditions, with expectations of improved absorption capacity for upcoming bond supply.
However, the rally reversed on subsequent reports that the RBI is evaluating a potential interest rate hike to stabilise the rupee. This points to a degree of discomfort with ongoing currency pressures and signals a willingness to adopt a more defensive stance if needed. India rates, in particular the front end of the OIS curve, repriced sharply as markets began to factor in the risk of tighter policy. Despite the upward repricing, G-Sec spread against UST remains broadly around pre-war levels, reflecting parallel expectations of a more prolonged higher-for-longer stance from the Fed.
In the near term, India rates should maintain an upward bias amid tighter financial conditions globally. The 10-year G-Sec yield could continue to drift higher if the rupee remains under pressure and expectations of policy tightening become more entrenched. Against this backdrop, a more cautious approach to duration appears warranted.
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