Indian government bonds logged a third consecutive session of losses on Thursday, as uncertainty over the Federal Reserve's rate path lifted U.S. yields, while the widening Gulf conflict also dampened sentiment. According to The Economic Times, the benchmark Indian 6.94% 2036 bond yield settled at 6.8132%, compared with 6.7964% on Wednesday, rising four basis points over three sessions through Thursday. The 10-year Treasury yield was up 8 bps since Tuesday at 4.68%, while the rise in U.S. Treasury yields dampened enthusiasm for Indian debt instruments. The benchmark brent crude saw-sawed during the day, hitting a high of $93 per barrel before falling to trade at around $90 per barrel as of 5:00 p.m. IST, as reported by The Economic Times.
Brent crude futures saw-sawed during the day, hitting a high of $93 per barrel before falling to trade at around $90 per barrel as of 5:00 p.m. IST, following the renewed U.S. airstrikes. As per The Economic Times, this represents continued volatility in oil prices. A drone strike on gas vessels in Egypt's Mediterranean port of Damietta signalled a potential new front in the U.S.-Iran war, raising the prospect of threats to navigation through the Suez Canal, the last remaining safe export route for Saudi oil. India is highly sensitive to oil prices as higher crude can simultaneously pressure inflation, the fiscal balance, current account and the rupee. The oil price surge has added to market uncertainty and is weighing on bond yields as investors reassess geopolitical risks in the region.
The Fed held rates steady on Wednesday, but three of its 12 voting members favoured a hike, while Chair Kevin Warsh did not offer a clear guidance on the policy path, adding to market uncertainty. This week's early advance in the U.S. bond market sets up Kevin Warsh's second meeting at the helm of the Fed, with markets expecting the Fed to remain on hold but seeing a roughly 30% chance of a hike. However, almost all economists surveyed by Bloomberg see the Fed keeping rates unchanged, with traders fully pricing in a hike by September. The Fed's decision is due post market hours, with money markets pricing a high probability of a 25-basis-point rate hike in September. Indian bond traders said they will closely watch for guidance on the Fed's rate path for the rest of the year, as higher U.S. rates may influence domestic rates.
The fall was capped by rising flows from Reserve Bank of India's measures to attract dollar inflows, traders said. The steps, announced in June, have brought in close to $32 billion into the country, RBI Governor Sanjay Malhotra said earlier this week, as reported by The Economic Times. The Reserve Bank of India's policy decision is due next week, with rates expected to remain unchanged on August 5, according to economists at Barclays. The Reserve Bank of India's policy decision is due next week, and policymakers are likely to keep the key repo rate unchanged at 5.25%, according to a Reuters poll of economists. This is the most uncertain that the market has been on whether the Fed will change rates going into a meeting since December 2018, said Jim Reid, global head of macro research at Deutsche Bank.
India's overnight index swap rates ended mixed as traders searched for fresh cues. The one-year rate was down 1 bp at 5.92%, while the two-year rate was flat at 6.12%, and the five-year rate rose 1.5 bps to 6.42%, according to The Economic Times. India's financial conditions have tightened recently, returning to levels seen at the June MPC meeting, as re-escalation in West Asia fighting and the accompanying surge in oil prices have outweighed the impact of RBI's policy measures. India's economic growth is expected to slow sharply this fiscal year from last year's strong expansion, a Reuters poll showed, while inflation has risen for eight straight months to 4.38%, surpassing the central bank's 4% medium-term target.
