Government bond yields may remain under pressure in early trade on Thursday after the Reserve Bank of India (RBI) raised interest rates for the first time in nearly four years and changed its policy stance, signalling that more rate hikes could follow.The benchmark 6.94% 2036 bond yield is expected to trade between 7.21% and 7.25%, a trader with a primary dealership said. The yield closed at 7.2410% on Wednesday. Bond yields rise when bond prices fall.“Unless there is a fresh open market sale announcement, the 10-year benchmark should hold around 7.25% level,” the trader told Reuters.The RBI raised its key interest rate by 25 basis points to 5.50%, from 5.25%, and changed its stance to “calibrated tightening” from “neutral”.The central bank also raised its inflation forecast by 20 basis points to 5.2%. Its forecast for core inflation, which does not include volatile food and fuel prices, was raised to 4.4% from 4.3%.RBI governor Sanjay Malhotra said the change in stance meant a “milder form of tightening” and that future decisions would depend more on incoming data rather than being decided in advance.“The RBI is normalising rates to keep real rates positive rather than materially tightening financial conditions, and with close to 100 bps of hikes already priced in, most of the adjustment in yields is behind us,” said Anurag Mittal, president and head of fixed income at UTI AMC.The RBI did not announce any new steps to reduce surplus liquidity in the banking system, even though the market had expected such measures. The decision was seen as slightly positive for bonds.In September, the RBI sold bonds worth 1 trillion rupees ($10.35 billion), its biggest bond sale in at least a decade.India’s overnight indexed swap rates are expected to remain in a narrow range, with some consolidation around current levels after the RBI’s policy decision.The one-year OIS rate ended at 6.25%, while the two-year rate closed at 6.4525%. The five-year OIS rate settled higher at 6.7225%.
