The Indian bond market faced a sharp sell-off on Friday as the yield on the benchmark 10-year Government Security (G-Sec) jumped to 7.31 per cent. This is the highest level seen since November 2023. Bond yields and prices move in opposite directions; when yields go up, it means the price of the bonds held by banks is falling. The day started with the yield at 7.26 per cent, but it rose steadily throughout the trading session.

The main reason for this panic is the fear that the Reserve Bank of India (RBI) will sell more bonds through Open Market Operations (OMO). When the RBI sells bonds, it sucks out cash from the banking system to control inflation. The central bank has already announced an OMO sale worth Rs 25,000 crore for October 13. However, treasury experts now expect the RBI to drain out as much as Rs 1 lakh crore in the coming weeks.

This shift in sentiment happened after the recent RBI monetary policy meeting. While the market expected a small interest rate hike, they were surprised by the RBI's 'hawkish' (tough on inflation) stance. Governor Sanjay Malhotra warned that inflation remains a big risk and interest rates might stay high for a much longer time than previously thought. The Governor even ruled out any chance of interest rate cuts in the near future.

For bank officers working in treasury departments, this is a challenging time. High yields mean the value of the bank's current bond holdings (the SLR portfolio) will drop, which could lead to mark-to-market (MTM) losses. MTM refers to accounting for the current market value of an asset rather than its purchase price. Treasury heads at Ujjivan Small Finance Bank and Karur Vysya Bank noted that the market was earlier comfortable with surplus cash, but the RBI now wants to tighten things up significantly.

Bankers are also keeping a close eye on upcoming inflation data. If the retail inflation numbers coming out next week are high, yields could rise even further. Some experts believe the 10-year yield could reach 7.5 per cent before the next policy meeting. There is also a change in how high people think interest rates will go. Earlier, the market thought the Repo Rate would stop at 6 per cent, but now many believe it could reach 6.25 per cent by FY27.

For regular customers, this rise in bond yields usually leads to higher borrowing costs. When government bond yields go up, banks often increase the interest rates on loans like home loans and car loans. On the positive side, it might lead to a slight increase in Fixed Deposit (FD) rates as banks compete for cash. For now, the market will stay volatile as everyone waits to see how much liquidity (available cash) the RBI decides to pull out from the system.