India : Indian government bonds are expected to remain range bound on Thursday as investors weigh declining crude oil prices against rising US Treasury yields and await the release of domestic inflation figures. The latest economic data could influence expectations surrounding the Reserve Bank of India’s (RBI) monetary policy decisions in the coming months.
The benchmark 10-year US Treasury yield approached the 5 per cent mark during Asian trading hours after October’s consumer price data exceeded market expectations. The stronger than anticipated inflation reading prompted traders to increase their bets on a potentially larger interest rate hike by the US Federal Reserve in December.
Attention has now shifted towards India’s October retail inflation figures, scheduled for release later on Thursday. According to a Reuters poll, annual consumer inflation is projected to rise to 5.93 per cent from 5.54 per cent recorded in September.
A higher than expected reading could strengthen expectations of another monetary tightening by the RBI next month, potentially putting additional pressure on government securities.
However, declining international crude oil prices could provide some support to domestic markets. Brent crude futures slipped around 1 per cent during Asian trading to USD 91.80 per barrel, offering temporary relief to India, which relies heavily on imported energy. Lower oil prices could help moderate inflationary pressures while easing concerns surrounding the country’s currency and fiscal position.
The benchmark 6.94 per cent government bond maturing in 2036 is expected to trade within a yield range of 7.18 to 7.23 per cent, according to a trader at a private-sector bank.
The bond closed at a yield of 7.2139 per cent on Wednesday after climbing 6 basis points, marking its sharpest single-session increase in approximately one month.
Trading activity remained subdued during Wednesday’s session as market participants avoided taking significant positions ahead of the government’s upcoming debt sale. Investors are particularly focused on Friday’s auction of the benchmark 10-year government security, through which the Centre plans to raise Rs 340 billion.
The sizeable offering is expected to provide an indication of investor demand for government debt and the market’s ability to absorb additional supply amid changing interest rate expectations.
A trader at an asset management firm said investors would be better positioned to take fresh market positions after Friday’s auction, once uncertainties surrounding consumer inflation, the RBI’s policy direction and demand for government securities become clearer.
The central bank raised its benchmark policy rate in October for the first time in nearly four years, signalling a shift in its monetary policy approach amid persistent inflation concerns.
Market participants are increasingly anticipating another 25-basis-point rate increase in December. However, some traders are preparing for the possibility of a more aggressive 50-basis-point adjustment, depending on incoming economic indicators and inflation trends.
Interest Rate Swaps
Overnight index swap (OIS) rates are also expected to remain firm, tracking movements in US Treasury yields and domestic monetary policy expectations.
On Wednesday, India’s one-year, two-year and five-year OIS rates increased by 8 to 9 basis points, reaching 6.3950 per cent, 6.39 per cent and 6.4825 per cent, respectively.
The continued rise in swap rates reflects growing caution among investors as they assess the possibility of further monetary tightening.
With domestic inflation figures, international bond market movements and the upcoming government securities auction all influencing sentiment, investors are likely to maintain a cautious approach until clearer signals emerge regarding the RBI’s next policy move.