India's short-term Treasury yields surge as RBI rate hike fuels premium

The Reserve Bank of India implemented its first policy rate hike in almost four years and indicated that additional increases are likely, with Governor Sanjay Malhotra emphasizing that monetary policy cannot be detached from financial stability. In response, New Delhi sold 182-day and 364-day Treasury bills at cutoff yields of 6.29% and 6.49%, the highest rates observed in roughly a year and a half. Compared with a week earlier, yields for both maturities rose by more than 20 basis points.

The spread over the 5.5% repo rate jumped to 79 basis points for the six-month bill and 99 basis points for the one-year bill, matching peaks last seen in November 2022. VRC Reddy, treasury head at Karur Vysya Bank, attributed the move to a clearly hawkish policy guidance and higher inflation, which have lifted expectations for the terminal rate. He warned that bond yields across different tenors could converge as the tightening cycle reaches its apex.