India bonds post first weekly rise in 5 weeks on RBI dovishness

The Reserve Bank of India kept its key interest rates unchanged for the third time in a row in the August policy outcome on Wednesday, with the monetary policy committee voting unanimously to keep the key repo rate on hold at 5.25 per cent while retaining the 'neutral' policy stance along expected lines. However, bond and equity markets responded positively as the central bank mildly cut its inflation projection and revised the growth outlook upwards. According to The Economic Times, the central bank left the repo rate unchanged, cut its average inflation forecast for the current financial year to 5.0% from 5.1%, and lowered its core inflation forecast to 4.3% from 4.7%. Following this, the yield on the 10-year government bond was trading at 6.7722%, down 4 basis points from earlier levels, with the yield having fallen 6 basis points to 6.76% shortly after the RBI rate announcement. Governor Sanjay Malhotra said the RBI would maintain 'sufficient' liquidity to keep the weighted average call rate aligned with the repo rate, which spurred demand for five-year bonds. RATES India's overnight index swap rates rose on Friday, but posted their biggest decline in over two months. The one-year swap ended at 5.77%, the two-year closed at 5.94%, and the most liquid five-year swap settled at 6.26%. RBI could be watching how core inflation evolves, rather than relying on forecasts given history of past undershooting and would consider policy changes only when this metric jumps to close to 4% inflation target, ICICI Securities Primary Dealership said in a note.

Indian government bonds surged on Wednesday, with yields falling below important levels as tumbling oil prices helped ease inflation fears for the world's third-largest oil importer. According to The Economic Times, India's benchmark 6.94% 2036 bond yield fell 4.5 basis points to a three-week low of 6.7722%, with bond yields moving inversely to prices. Benchmark Brent crude fell 5.2%, extending Monday's more than 7% slide, easing inflation concerns for India. The oil crash came after comments by Qatari and U.S. officials raised hopes for a diplomatic resolution to the Iran war, which could improve oil flows through the Strait of Hormuz. "Oil prices crashed after comments by Qatari and U.S. officials raised hopes for a diplomatic resolution to the Iran war, which could improve oil flows through the Strait of Hormuz," said a trader at a private-sector bank. "Oil has completely turned the tide and now has become supportive of bond bulls, which should be evident in price action today," the trader added. India is a large importer of crude and a plunge in prices improves the outlook for inflation as well as the current account deficit. Oil prices hovered around $80 a barrel in Asian trade and have averaged $82-$83 since June, well below the RBI's $95-a-barrel assumption in its June policy review.

New Delhi plans to raise ₹320 billion through bond auctions later today, adding significant pressure to bond markets after the previous rally. According to The Economic Times, "Appetite for the long-term note will be key to watch at the auction, with U.S.-Iran tensions and soaring oil prices stoking fears of higher global rates," said a private-bank trader. The benchmark 6.94% 2036 bond yielded 6.7869% at 10:40 a.m. IST, 2 basis points above Thursday's close, reflecting the market's cautious stance ahead of the major auction. Market participants are now focused on a major bond auction set for Friday, while overnight indexed swap rates saw a modest rise as traders adjusted their positions. Four economists said on Thursday that the RBI is now likely to begin raising rates from December or later, as core inflation staying near the central bank's target rate reduces the case for earlier tightening. Overnight indexed swaps, a key gauge of rate expectations, now price in about 50 basis points of hikes over the next year, down from as much as 125 basis points during the peak of the Iran crisis.

Indian government bonds edged higher on Tuesday as traders built positions ahead of the Reserve Bank of India's policy decision, with the benchmark 6.94% 2036 bond yield settling at 6.8152%, down from Monday's close of 6.8343%. According to The Economic Times, the RBI is widely expected to keep its key policy rate unchanged on Wednesday, with a Reuters poll showing this as the consensus view. The Reserve Bank of India is widely expected to keep its key interest rate unchanged, according to a Reuters poll, with most economists not anticipating a hike in 2026. While no action on rates is largely a given, commentary on economic projections holds the key, after retail inflation accelerated to 4.38% in June, above the RBI's 4% target. "The August policy reduces the risk of an immediate rate hike. The RBI's comfort on underlying inflation, combined with its assurance on system liquidity, should support the short-to-medium part of the yield curve," said Edelweiss Mutual Fund in a note. The one-year swap rate was down 6 bps at 5.81%, while the five-year OIS rate pummelled 8 bps to 6.28%, with the two-year rate not yet traded. Foreign banks bought ₹91 billion of bonds on Wednesday, while state-run banks sold a similar amount, likely locking in profits after the rally, traders said. Market participants expect profit-taking by state-run banks to continue-the banks sold about $1 billion of bonds on Wednesday.

Indian government bonds finished the week with little change on Friday, yet celebrated their first gain in five weeks as a fall in oil prices and dovish central bank commentary boosted market appetite. According to The Economic Times, the yield on India's benchmark 6.94% 2036 bond ended at 6.7651% against 6.7666% previous close, with the yield falling 7 bps for the week. In the current financial year, the rupee is down 0.33 per cent, while the benchmark bond yield has fallen 26 basis points. So far in August, the rupee has appreciated 0.28 per cent and the benchmark yield has eased 7 basis points. According to Business Standard, the decision would diverge from many of its global peers as inflation remains modest despite higher global oil prices, while steps to support the rupee have driven strong inflows. Market experts widely expect the RBI to maintain the status quo on interest rates in its August policy review, with Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Investments Ltd, expecting the RBI to maintain the status quo on interest rates in its August monetary policy review. He said that, in the absence of any policy change, bond yields are unlikely to witness significant movement, with the 10-year government bond yield likely to trade in the 6.8%-6.9% range. "We expect market to stabilize around current levels and trade with positive bias with 10-year bond trading between 6.65% - 6.85% range. Short-term yields are likely to go down further from current levels," said Amit Somani, deputy fixed income head at Tata Asset Management. According to Vijayakumar, the RBI Governor's commentary on the inflation outlook and the central bank's future policy stance will be the key factors influencing yield movements.