Key Takeaways
- Indian government bonds may edge lower as higher crude prices and global yields curb demand.
- The Reserve Bank of India plans to sell 1 trillion rupees of bonds, adding to supply concerns.
- Analysts predict an October rate hike by the RBI due to elevated inflation.
Indian government bonds are expected to face downward pressure early Wednesday, as higher crude prices and rising global yields dampen investor interest. This comes ahead of the US Federal Reserve’s policy decision, which is likely to reinforce expectations of a rate hike by the Reserve Bank of India (RBI).
The benchmark 6.94% 2036 bond yield is anticipated to trade between 7.05% and 7.12%, according to a private-bank trader. On Tuesday, it closed at 7.0727%, its highest level in four months, reflecting the current market sentiment.
Traders are concerned that the RBI’s planned open market sales, starting Thursday, will exacerbate an already fragile supply-demand dynamic. The RBI will sell 1 trillion rupees of bonds in three tranches, adding to the market’s uncertainty.
A private-bank trader commented, 'We have opened a can of worms; OMO sales are adding to the supply at an uncertain time, when there is no confidence to buy.'
Brent crude futures have climbed 3.5% to $108 a barrel in Asian trade, amid ongoing conflicts in the Middle East. This rise in oil prices is contributing to the overall market volatility.
US Treasury yields have eased marginally after testing multi-decade highs in the previous session. The 10-year US Treasury yield briefly rose above 5%, its highest since the 2008 financial crisis, while the average 10-year yield across the Group of Seven largest economies reached 4.285%, the highest since mid-2008.
Analysts are hardening their bets on an October rate hike by the RBI, with annual CPI inflation rising to 4.82% in August from 4.45% in July. Deutsche Bank has brought forward its rate-hike call to October, citing the prospect of a Fed tightening cycle.
The RBI’s rate hike expectations are also influenced by the recent inflation data, which has prompted policymakers to consider tighter monetary policies. Traders are closely monitoring the RBI’s moves and the US Federal Reserve’s decision, as both are expected to impact the Indian bond market significantly.
We have opened a can of worms; OMO sales are adding to the supply at an uncertain time, when there is no confidence to buy.
Private-bank trader, Private-bank trader
