Indian government bonds ended the week rangebound as fading inflation and rate-hike concerns left traders seeking market direction, according to The Economic Times. The benchmark 6.94% 2036 bond yield closed at 6.7578% on Friday, versus 6.7582% in the previous session, with the borrowing rate failing to breach the 6.75% mark, a key psychological level. The yield curve steepened this week, attracting value buyers into long bonds as relatively higher yields drew investors, with traders noting that the belly of the yield curve remained anchored by ample supply. Long bonds attracted value buying as the gap between yields on the 10-year and 40-year bonds narrowed to a six-week low of 69 basis points, as reported by The Economic Times.
Rising oil prices kept pressure on bonds, with Brent crude gaining more than 4% this week to $87 per barrel, as reported by The Economic Times. The decline in oil prices is positive for India, the world's third-largest crude oil importer, as lower import costs can help ease inflationary pressures and improve the fiscal outlook. As per The Economic Times, India, the world's third-largest oil importer and consumer, is particularly vulnerable to swings in crude prices, with elevated oil prices potentially stoking inflation and straining the fiscal balance, current account and currency in India. The rupee closed at 95.2075 per dollar on Friday, up about 0.2% week-on-week, but the latest crude surge adds to inflationary pressures that could impact domestic fiscal and trade balances.
US consumer prices rose 0.1% in July after falling in June, while annual inflation eased to 3.4% from 3.5%, according to The Economic Times. The data has strengthened expectations that neither the RBI nor the Federal Reserve would raise rates soon, with traders noting that two muted inflation prints in a row should be sufficient to quell worries that price pressures are broadening beyond energy. The 10-year U.S. Treasury yield was last down 2 basis points at 4.67%, with the recent dip in U.S. inflation and reducing Fed hike bets reinforcing the case for a prolonged rate pause in India. DBS Bank noted that two muted inflation prints in a row should be sufficient to quell worries that price pressures are broadening beyond energy, adding that softer labour-market momentum reduced the case for near-term Federal Reserve tightening. India's retail inflation rose to 4.45% in July from 4.38% in June, but came in slightly below market expectations, enhancing bond market optimism.
New Delhi will raise ₹32,000 crores ($3.35 billion) through a bond sale later in the day, including two new securities that will mature in three years and seven years, according to The Economic Times. The major question remains whether there are enough buyers for the 10-year bond yield to break past the 6.75% mark, as noted by a trader. Despite the challenging environment, ample banking system liquidity from the RBI's diaspora deposit scheme supported demand, especially for the short-end. As reported by The Economic Times, the RBI's diaspora deposit scheme to attract foreign inflows has brought in over $36.7 billion as of July 17, RBI data showed. The inflows, coupled with government spending, have pushed India's daily average cash surplus to over ₹3 trillion in August. India's overnight index swap rates may ease marginally, tracking the moves in oil as well as Treasuries, with India's rates expected to move in line with global trends.
Indian government bonds traded within a narrow range this past week as traders sought market direction amid fading inflation and rate-hike concerns, according to The Economic Times. Liquidity from a deposit scheme for attracting dollars from non-resident Indians, coupled with softer inflation prints in India and the United States, has blunted the oil-driven pressure and cooled rate-hike expectations. India's overnight index swap rates fell for a third straight week as RBI rate-hike bets receded, with the one-year swap rate falling 3.5 bps over the week to 5.73%, the two-year rate declining 2 bps to 5.9225%, and the five-year rate easing 1.5 bps to 6.2475%. Investors now await New Delhi's ₹32,000 crore debt sale on Friday for further cues on demand, with the major question still remaining whether there are enough buyers for the 10-year bond yield to break past the 6.75% mark.
