India 10Y Yield Steady on Oil, CPI

The yield on India’s 10-year G-Sec hovered around 6.78%, trading in a tight range as elevated oil prices restrained demand for government bonds ahead of key India and US inflation data. Brent crude rose 0.8% to $89.6 per barrel, as uncertainty over the Middle East conflict kept oil prices elevated and raised inflation concerns. Meanwhile, India’s July inflation data, due later Wednesday, is expected to show inflation rising to 4.50% from 4.38% in June, while a hotter-than-expected US reading could revive Fed rate-hike bets and put upward pressure on Indian yields by narrowing the yield premium over US bonds. However, expectations for further RBI rate hikes have eased since the central bank kept rates unchanged last week and lowered its inflation forecasts. Strong foreign inflows and ample liquidity have also supported bonds, with the RBI’s diaspora deposit scheme attracting over $36.7 billion as of July 17, while the daily average cash surplus exceeded INR 3 trillion in August.

The yield on India’s 10-year G-Sec hovered around 6.79%, rising after stabilizing as higher oil prices and a rise in US Treasury yields weighed on government bonds. Brent crude settled 5% higher on Monday and extended gains to above $88 per barrel. The rise in oil prices came as Iran and the US exchanged demands for compensation, dimming prospects for a deal to reopen the Strait of Hormuz. Higher oil prices raised concerns over inflationary pressures and pushed the US 10-year Treasury yield to around 4.70%, prompting traders to raise the probability of a September Federal Reserve rate hike to 51% from 44% a day earlier. Meanwhile, investors are awaiting India’s July inflation data, due Wednesday. Despite the near-term pressure from oil and US yields, sentiment toward Indian bonds remained relatively supportive after the RBI kept its repo rate unchanged and lowered its inflation forecast at last week’s policy meeting, leading analysts to push back expectations for future rate hikes.

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.