India 2036 bond yield hits 7.3707% as RBI drains cash

India’s benchmark 6.94% 2036 government bond yield rose to 7.3707% by 10:20 a.m. IST on Monday, Oct. 12, Reuters reported via the Economic Times.

The move took the yield above Friday’s 7.2994% level after the Reserve Bank of India said it would sell 250 billion rupees, or $2.58 billion, of bonds on Tuesday and lift banks’ daily cash reserve maintenance requirement to 99% from 90% on Oct. 16.

Liquidity squeeze

Bond yields rise when prices fall, so the market reaction reflected weaker demand for Indian government debt after the central bank outlined steps to pull rupee liquidity from the banking system.

The 6.94% 2036 yield reached its highest level in three years, according to the Reuters report. It has risen for eight straight weeks, adding 54 basis points over that period.

The action followed an RBI policy meeting at which the central bank raised its policy rate for the first time in nearly four years and pointed to more increases ahead. At that meeting, Reuters reported, the RBI did not announce liquidity-draining steps, and Governor Sanjay Malhotra said the rise in surplus cash would be temporary.

“Such flip-flops impact the credibility and often lead to a larger reaction in asset prices, as compared to what would have been,” a trader with a primary dealership told Reuters.

Rupee and oil pressure

The RBI also sought to ease pressure on the rupee by allowing oil marketing companies to buy dollars directly from the central bank through a special window, Reuters reported. It also tightened hedging rules.

Traders told Reuters those currency measures would also reduce rupee liquidity in the system. Foreign-exchange operations can affect domestic liquidity when rupees are absorbed as dollars are supplied.

Oil added another concern for investors. Benchmark Brent crude stayed above $100 a barrel, a level Reuters said could affect India’s inflation path and public finances because the country depends on imported oil.

India’s September retail inflation data were due later on Oct. 12. A Reuters poll showed economists expected the print to rise 5.4% year on year.

Rates reaction

Overnight indexed swap rates, derivatives used to express views on future interest rates, moved higher, with the front end of the curve reacting more to the liquidity squeeze, Reuters reported.

The one-year overnight indexed swap rate was at 6.34%, the two-year rate at 6.53% and the liquid five-year rate at 6.76%. The report did not give prior levels for those swap rates.

The market’s next focus is whether the RBI’s liquidity operations change demand at the Oct. 13 bond sale and whether inflation data support the concern that oil prices will keep price pressures elevated.

What to watch

On Oct. 12, India’s September retail inflation print is due. The Reuters poll cited in the report showed a 5.4% year-on-year expectation.

On Oct. 13, the RBI is scheduled to sell 250 billion rupees of bonds, equal to $2.58 billion, as part of its liquidity-draining operation.

On Oct. 16, banks must maintain 99% of their daily cash reserve requirement, up from 90%, according to the Reuters report.

Source: Reuters report published by The Economic Times, Oct. 12, 2026