Reserve Bank of India

The Reserve Bank of India has completed net sales of government debt totalling 1 trillion rupees, the first time it has reached that mark in a decade. The move points to the central bank actively draining liquidity from the banking system, a shift that traders and economists are watching closely for its impact on bond yields.

A Reuters poll of economists indicates the Reserve Bank of India is expected to raise its key interest rate to 5.50% at its October meeting. The anticipated hike reflects growing concern that inflation in India is broadening beyond food and fuel into core categories, putting pressure on the central bank to tighten policy further despite growth risks.

Analysts point to broadening inflation pressures, resilient economic growth and interest rate hikes by central banks worldwide as strengthening the case for the Reserve Bank of India to tighten monetary policy. The argument is that with price rises spreading beyond food and fuel and growth holding firm, the central bank has both the reason and the room to act, in line with the global tightening cycle.

Indian companies are preparing roughly $3 billion worth of bond issues, moving quickly in case the Reserve Bank of India raises interest rates. Borrowers want to lock in funding at current levels before any hike makes debt more expensive. The rush highlights how sensitive Indian corporate borrowing is to the central bank's next policy move.

The Indian rupee is trading just short of 96 against the US dollar, with the Reserve Bank of India intervening to limit the slide. Pressure on the currency is being driven largely by India's oil import costs, which have weighed on the balance of payments. The central bank's actions are keeping the rupee range-bound near record-low levels, and markets are watching how long the RBI can hold the line.

Traders say the Reserve Bank of India is intervening to shield the rupee as a deadlock between the United States and Iran pushes oil prices higher. Higher crude costs widen India's import bill and pressure the currency, prompting speculation the central bank is selling dollars to limit depreciation.