India’s central bank wrong-footed investors by opening the door to interest-rate increases, in a striking shift that sent bond yields higher and raised fresh questions about how it communicates with the market.
Minutes of the Reserve Bank’s August meeting released on Wednesday showed a growing inclination toward tighter policy as members become increasingly wary of inflation risks.Deputy Governor Poonam Gupta raised the possibility of a rate hike later this year, while an executive director stopped just short of doing so. External members Ram Singh and Saugata Bhattacharya also flagged the potential need for policy recalibration or swift adjustments.
The messaging was read as hawkish by markets and comes after RBI chief Sanjay Malhotra said a little over two weeks ago that Indian inflation remains manageable, reinforcing expectations that borrowing costs will stay on hold. The central bank unanimously kept the repurchase rate at 5.25% this month and retained its neutral stance.On Thursday, bonds fell as traders reassessed the rate outlook, with the yield on the benchmark 10-year government bond rising as much as 4 basis points to 6.86%. Five-year yields climbed as much as 8 basis points to 6.53%.
