Indian government bonds traded in a tight range on Wednesday, with the benchmark 6.94% 2036 note yield at 6.8626% as of latest data, after closing at 6.8651% on Tuesday. The oil-led rally ran into profit booking as traders showed caution over further rallying, with focus shifting to the U.S. Federal Reserve policy decision. A fixed-income trader at a private bank noted that "there is no sufficient conviction for yields to drop further sharply, and hence profit taking at current levels is keeping bonds range-bound." The benchmark Brent crude contract had fallen 5% for a second consecutive session on Tuesday, as details of the interim peace deal began to emerge. The 10-year yield has eased 8 basis points in a week and hovered at a 12-week low, indicating sustained downward pressure despite recent consolidation.
Brent crude futures fell below $80 a barrel for the first time since early March, but edged higher in Asian trade at $79.28 per barrel, showing some stabilization after the sharp decline. The yield on the Indian benchmark 6.94% 2036 note dropped 2.5 basis points to settle at 6.8704%, its lowest since April 15. India imports about 90% of its crude oil requirements and a sustained fall in prices could ease pressure on inflation, the rupee and the country's trade deficit. The slump in oil prices will help the Reserve Bank of India's efforts to channel billions of dollars into debt, helping secure foreign inflows to cover India's import bill and support the rupee. However, STCI Primary Dealership warned that prolonged supply disruptions could prompt rate hikes from Q3 FY2026-27, depending on macro conditions.
Foreign investors have bought domestic bonds worth more than $2 billion over the last eight sessions since the Reserve Bank of India announced measures on June 5, demonstrating renewed confidence in the market. India's recent debt market reforms have shown immediate results, with foreign inflows into Indian debt accelerating in the wake of announced measures. The government last week announced tax cuts for overseas bond investors and a host of measures aimed at boosting inflows and improving market access. These steps have been particularly well-received by some managers, with some viewing the steps positively, particularly for India's case for inclusion in the Bloomberg Global Aggregate Index. BlackRock noted that the measures would support India's case for inclusion in the Bloomberg index, adding that BlackRock would 'almost always favour making markets more accessible,' particularly for large economies whose bond markets are underrepresented in global benchmarks.
The Federal Reserve is due to announce its first policy decision under new chair Kevin Warsh after Indian market hours, with a rate action unlikely but traders focusing on commentary to gauge 2026 rate hike expectations. India's overnight index swap rates continued to ease, with the one-year swap rate at 5.88%, the two-year rate at 6.04%, and the five-year rate at 6.2950%, each pared 1 basis point. Indian states will aim to raise ₹216 billion ($2.28 billion) through bond sales later in the day, adding to market activity. According to The Economic Times, traders are now awaiting the Fed's verdict, with hawkish guidance potentially widening U.S.-India differentials and dampening foreign investment in Indian bonds. The interim deal would end the Iran war, lead to reopening of the Strait of Hormuz and the US removing its naval blockade of Iran.
