The Monetary Policy Committee of the Reserve Bank of India dropped enough hints last week that interest rate hikes, forget a cut, are still on the table as inflation uncertainty persists.

The RBI has said food inflation is unlikely to come down immediately, and overlaps of episodes of food inflation may create generalised inflation and inflation expectations.

The RBI also kept up the pressure on liquidity. Since it unwound the incremental cash reserve ratio it had imposed in August, the central bank said it would line up bond sales under open market operations.

Bond yields rose by the sharpest margin in over a year after the RBI’s announcement. The market was already fretting over the steady rise in US yields and concerns over the Fed’s rate stance.

There is a fear that RBI could follow the Fed in raising rates if the US central bank hikes the Fed rate in November.

US employment unexpectedly surged in September, pointing to a durable labour market, and strengthening the case for another Federal Reserve interest-rate hike.

Nonfarm payrolls increased 336,000 in September, higher than expectations, after sizable upward revisions to the prior two months. The unemployment rate was at 3.8%.

Indian Markets Last Week:

Stocks snapped a two-week losing streak to close higher for Friday and the week. Rate-sensitive stocks gained after the RBI left key interest rates unchanged and kept its forecasts for inflation and GDP growth unchanged. Most sectoral indices, including the realty index, rose.

Yields jumped this week. The 10-year yield rose over 10 basis points or by the biggest margin in over a year after the RBI surprised the market by announcing its intention to commence the open market sale of government bonds. In contrast to stocks, the bond market saw more hawkishness from RBI than the previous policy.

The rupee fell for the week owing to strong dollar and firm US treasury yields. There weren’t too many takeaways from the RBI. The market is more cued into what the Fed might do next year. The RBI governor reiterated that the central bank was not defending a particular rupee level but would sell or buy dollars to contain volatility in the exchange rate.

Global Markets Last Week:

US stocks ended mixed for the week. Nasdaq posted its largest daily percentage gains since late August, while the S&P 500 climbed for the week, breaking a four-week losing run. On Friday, US equities soared, led by technology firms, to a substantially higher close as investors weighed jobs data that showed US hiring grew broadly in September despite slower pay growth.

US treasury yields surged after the US job data reported better-than-expected numbers. The 10-year yield neared 4.84%, while the 30-year paper rose above 5%, at their highest level since 2007. Concerns are that the Fed will keep interest rates elevated for an extended period.

US dollar dipped against a basket of currencies for the week, snapping an 11-week winning streak after jobs data indicated that hiring in the US increased broadly for September, but the wage growth is slowed. Market participants expect that the US Fed may cut rates in the later part of 2024. The market now doubts if the Fed can manage the soft-landing of the economy.

Corporate Bonds

Secondary Market

Yields surged by 15-20 basis points across the yield curve for the week on the view that liquidity will tighten further after the RBI announced open market operation government bond sales. Mutual funds were active traders in the secondary market for most part of the week. Few banks and a life insurer were buying corporate bonds.

Outlook For This Week

This week, stocks may weaken in a late reaction to the hawkishness signalled by the RBI. Moreover, concerns over the prospects for global growth and earnings in the backdrop of central banks’ stance could prevent a big rise in stocks. Bond yields will likely drift higher, but a big rise is unlikely. Traders would be worried about the RBI’s plan to conduct open market operations. The rupee will likely stay weak against the dollar amidst concerns about firm US yields.

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