India benchmark bond posts worst day in six months on RBI measures

September consumer inflation also accelerated to 5.54%, versus a 5.40% estimate in a Reuters poll, underscoring the risk of more rate hikes in the coming months as Brent crude holds above $100 a barrel.

"We think FY27 inflation could be in the 5.30%-5.40% range and could further continue inching up in Q1FY28. This reiterates our view of a total 75-100 bps rate hike cycle," said Akhil Mittal, senior fixed income fund manager at Tata Asset Management.

Indian government bonds experienced a significant decline due to central bank measures aimed at draining liquidity. The benchmark 10-year bond yield rose to its highest level in three years, signaling potential rate hikes. Consumer inflation increased to 5.54%, exceeding forecasts and raising concerns over future monetary policy. The Reserve Bank of India announced bond sales and changes to cash reserve ratio maintenance.

India's benchmark 6.94% 2036 bond yield surged nearly 9 basis points to 7.3857%, a three-year peak. The yield had risen 54 bps over the previous eight weeks.

Over the weekend, the Reserve Bank of India said it will sell 250 billion rupees ($2.58 billion) of bonds and lifted banks' daily cash reserve ratio maintenance. The RBI also redirected oil companies' dollar purchases away from the spot market.Traders said the combined measures could sharply tighten banking-system liquidity.

The moves followed the first rate hike in nearly four years, and signalled a shift toward tighter liquidity conditions, leaving traders wary of further open-market bond sales.

"Policymakers are facing the impossible trinity, and the success of these measures will depend on global conditions. If these do not improve, then more difficult policy choices will need to be made, and a broader policy toolkit - encompassing currency flexibility, fiscal-liquidity-monetary policies and structural reforms - will need to be activated," Nomura said in a note.

India's overnight indexed swap curve steepened after RBI's measures.

The one-year OIS rate surged 11.75 bps to 6.36%, the two-year rate gained 11.25 bps to 6.55%, while the liquid five-year rate jumped 7.5 bps to 6.7975%.