Key Takeaways
- Indian government bonds expected to trade within a narrow range of 6.94% to 6.98%.
- Focus remains on Reserve Bank of India's liquidity management actions.
- Elevated oil prices and US Treasury yields weigh on sentiment.
Indian government bonds are anticipated to trade in a narrow range of 6.94% to 6.98% in early deals on Tuesday, according to a trader at a private bank. This is based on the benchmark 6.94% 2036 bond closing at 6.9607% in the previous session.
The central bank’s liquidity management actions and global factors, including elevated oil prices and US Treasury yields, are expected to keep the bond yields in a shallow trading range of 3 to 4 basis points.
The Reserve Bank of India (RBI) will conduct an overnight variable rate reverse repo on Tuesday for 5 trillion rupees ($52.92 billion), following a withdrawal of over 6 trillion rupees from banks through a combination of overnight and 30-day VRRR the previous day.
The RBI has been managing liquidity to accommodate large diaspora deposit inflows, which have surged to a record high. Sustained liquidity surpluses could potentially raise inflation and boost financial asset prices.
Meanwhile, oil prices remain elevated, with the benchmark Brent crude contract staying above $97 per barrel. Fresh military escalation between the US and Iran has heightened concerns of a prolonged supply disruption, which could worsen India’s inflation trajectory and impact government finances.
The 10-year US bond yield was around 4.78% in Asian trading, reflecting increased bets on a 25-basis point hike by the Federal Reserve next week.
Traders are closely watching these developments, with the central bank’s liquidity management actions and global economic factors expected to continue influencing bond yields.
Until major changes in global factors or the RBI’s plans for liquidity management, the benchmark bond yield is expected to remain squeezed in a shallow trading range.
