India 10Y Yield Retreats Ahead of Fed Decision

The yield on India’s 10-year G-Sec edged up to around 6.78% on Friday, retracing part of this week's decline as a sharp rebound in oil prices dampened demand for government bonds ahead of the New Delhi's INR 320 billion debt auction. Investors closely monitored the sale of five-year and 40-year securities for cues on demand, particularly for longer-dated debt. Meanwhile, Brent crude climbed to around $83.7 per barrel, up nearly 6% amid renewed concerns over shipping through the Strait of Hormuz, raising worries over India's import bill, inflation, and the rupee. Higher oil prices also pushed the US 10-year Treasury yield up to 4.68%, reducing the appeal of emerging-market debt. Still, expectations that the Reserve Bank of India will maintain ample banking system liquidity following its dovish policy decision and lower inflation forecast continued to underpin sentiment, while reports of RBI intervention in the foreign exchange market helped limit pressure on the rupee.

The yield on India’s 10-year G-Sec fell to around 6.73%, extending losses for a third consecutive session to a near three-week low as the Reserve Bank of India's dovish policy stance continued to boost demand for government debt. The central bank kept its repo rate unchanged while lowering its inflation forecasts for both headline and core inflation, reinforcing expectations that policy tightening will be delayed. Investors also took comfort from softer crude prices, with Brent hovering near $79 a barrel, well below the RBI's previous oil price assumption, easing concerns over inflation. Meanwhile, overnight indexed swap rates declined as markets pared expectations for future rate hikes to around 50 basis points over the next year, down sharply from 125 basis points during the peak of the Iran crisis. Attention now turns to Friday's INR 320 billion government bond auction, which will test whether strong demand can sustain the recent rally.

The yield on India’s 10-year G-Sec hovered around 6.84%, edging higher after losses in the previous session as investor sentiment remained subdued following Bloomberg's decision to defer the inclusion of Indian government bonds in its Global Aggregate Index. The decision disappointed investors who had largely viewed index inclusion as a near certainty, triggering foreign sales of nearly $600 million in bonds under the Fully Accessible Route over the last six sessions, including the biggest weekly outflow in four months. Still, overseas investors remained net buyers of $3.9 billion in FAR bonds between June 1 and July 31. Investors also awaited this week's Reserve Bank of India policy meeting, where economists expect the central bank to keep interest rates unchanged, while closely monitoring its assessment of inflation risks from elevated oil prices and weak monsoon rainfall.