STRATEGISTS SAY OIL SHOCK MAY PUSH INTEREST RATES HIGHER AS BOND MARKETS ADJUST
A global energy shock is driving a structural shift in interest rates, with bond markets rapidly adjusting to a higher “neutral” rate environment even as central banks, including the RBI, remain cautious on immediate policy moves.
Suyash Choudhary, Chief Investment Officer-Fixed Income at Bandhan AMC, said the recent spike in yields reflects not just fundamentals but also an overshoot driven by market positioning and risk repricing. However, the bigger shift underway is structural. “Neutral levels of interest rates are moving up,” he noted, pointing to sustained external pressures and rising global inflation risks.
Echoing this, Abhishek Upadhyay, Senior Economist at ICICI Securities Primary Dealership, highlighted that the current environment presents a complex policy trade-off. With crude-driven inflation risks rising and growth facing supply-side disruptions, the RBI may have to balance vigilance on inflation with support for growth.
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For now, consensus expectations suggest inflation around 4.5% and growth between 6.5% and 7%, though near-term growth could soften further if disruptions persist. Unlike past crises, the current shock blends elements of both a commodity price spike and a growth slowdown, making policy responses less straightforward.
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One notable shift is the declining influence of the policy rate itself. Bond markets are increasingly being driven by global cues, term spreads, and external account dynamics, rather than the RBI’s repo rate alone. As a result, yields have adjusted sharply, with markets already pricing in a gradual normalisation of rates over time.
On liquidity, the RBI is expected to remain broadly neutral, relying on passive tightening measures if inflation risks intensify rather than taking aggressive action.
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2026-04-07T10:38:37Z