Indian government bonds were flat early Tuesday following a recent selloff, as oil prices absorbed stringent US sanctions without a spike, allaying jitters for the world's third-largest oil importer. According to The Economic Times, the yield on the benchmark 6.94% 2036 bond was flat at 6.8708% as of 12:10 p.m. IST, with the yield climbing 2 basis points in the previous session. Traders are also awaiting states' ₹201 billion ($2.10 billion) debt sale later in the day, which will test appetite. A trader noted that "A lot of factors are weighing on bonds - the Gulf crisis, weakening currency, and inflation, and we may see some selloff after the discounted swap-window closure." The bond market had logged its worst week of the financial year last week, struck by a double blow from the Reserve Bank of India's surprisingly hawkish policy minutes and the early closure of a diaspora-deposit hedging facility.
ICICI Bank has taken a significant step by doubling its overseas borrowing limit to five billion dollars, enhancing the bank's ability to tap into international fundraising avenues. This strategic decision follows the closure of a previous swap facility, with Indian banks ramping up efforts to collectively secure at least five billion dollars through loans and bonds. According to The Economic Times, ICICI has successfully raised over two billion dollars in dollar-denominated debt so far. HDFC Bank has achieved a remarkable feat by securing $1.75 billion through a dual-tranche dollar bond issuance, marking the largest single debt fundraising effort by any Indian bank, with investor demand surging to about $7 billion in bids.
The minutes of the Reserve Bank of India's August policy meeting published last week, showed that policymakers remain open to raising interest rates if inflationary pressures emerge and become more broad-based. As reported by The Economic Times, Governor Sanjay Malhotra said signs of such spillovers could justify policy tightening, while Deputy Governor Poonam Gupta said the case for a rate hike could develop later this year. Expectations of an RBI rate hike this year have resurfaced as inflation pressures build, with the hawkish tone leading to expectations of monetary tightening as early as October. MUFG Bank said in a note that the minutes prompted a swift repricing of rate hike expectations, with traders expecting RBI to hike rates by 50 bps starting in the December meeting.
Benchmark Brent crude held near $92 a barrel as investors wanted clearer signs of supply disruption, with elevated prices continuing to weigh on the country's energy sector. As reported by The Economic Times, Treasury Secretary Scott Bessent on Monday announced what he called an "economic onslaught" targeting Iran's global financial links, broadening sanctions while warning countries and firms against doing business with Tehran. Before the announcement, Iran had threatened a military response and deeper cuts to Gulf oil exports if Washington imposed further economic measures. India, the world's third-largest oil importer, is vulnerable to higher crude costs, which could stoke inflation and strain both the current account and government finances. Elevated crude prices could stoke inflation, widen the current account deficit and add pressure on government finances.
Swap rates saw little activity after a substantial spike last week, with the one-year and the two-year swaps were not yet traded rate, after ending at 5.9025% and 6.1250% on Friday, while the five-year rate was steady at 6.43%. According to The Economic Times, the one-year fell 1.5 basis points to 5.9025%; the two-year dropped 3 basis points to 6.1050%; and the five-year eased 2.75 basis points to 6.42%. Indian debt markets are shut on Wednesday for a local holiday, with Japanese government bond yields climbed on Monday amid concerns stemming from the Middle East instability. Market participants are now looking for insights from the U.S. Treasury Secretary on the situation in Iran, with Japan's ministries having requested a budget exceeding 130 trillion yen for the first time, highlighting the financial uncertainties that traders will remain vigilant about.
