Given the declining trajectory of local inflation - particularly core inflation - it is unlikely that the Reserve Bank of India would turn to rate hikes after maintaining a status quo on rates for more than a year. What the rise in swap rates show more than anything else is heightened risk aversion and the damage done to rate cut expectations by the abrupt ratcheting up of tensions in the Middle East.
The multiple price auction method was suspended by the RBI for most debt auctions in July 2021 amid severe market volatility due to sharp increases in government borrowing during the COVID crisis. While the method encourages deeper price discovery for bonds, it can result in higher cost of borrowing for the issuer - the government in this case - when market conditions are adverse.
A slower-than-expected inflation decline in the US and sobering Federal Reserve commentary on when its much-awaited policy easing may start has also prompted Indian traders to reduce their bets on how much rates the RBI will cut this year.
As of January 18, foreign funds owned 21.2%, or ₹10,398 crore worth, of outstanding stock of a government bond maturing in 2028, Clearing Corporation of India data showed. The bond, which has an outstanding stock of ₹49,000 crore, is among the most liquid in the secondary market.