India 10Y Yield Holds Near 4-Week Low

The yields on India’s 10-year G-Sec weakened to around 6.76%, hovering near four-week lows as inflation data from India and the US reinforced expectations that neither central bank is likely to raise rates soon. Market participants assessed India’s July CPI, which rose to 4.45% from 4.38% in June, below the 4.50% forecast and comfortably within the RBI’s tolerance range. Meanwhile, US annual inflation slowed to 3.4% in July from 3.5% in June, marginally reducing expectations of a Federal Reserve rate hike next month and supporting US Treasuries. However, the decline in Indian yields remained limited as Brent crude held around $88 per barrel, keeping inflation risks in focus for the world’s third-largest oil importer. The US 10-year Treasury yield also remained elevated, while market participants shifted their attention to Friday’s INR 320 billion government bond auction, which is expected to provide the next major direction for yields.

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.