Indian bonds may gain with Treasuries, but crude and supply may limit the rally

what happened

Indian government bonds may edge higher on Thursday, supported by firmer US Treasuries, according to Reuters. Swings in crude prices and a large upcoming debt auction could, however, limit the gains.

The US Federal Reserve kept borrowing costs unchanged late on Wednesday, as expected. It said inflation, which it described as still elevated, needs more data, and it postponed any policy move until after next week's midterm elections. The 10-year US Treasury yield, a key global benchmark, rose briefly after the decision but was down 6 basis points at 4.98% in Asian trade.

A private-bank trader expects the benchmark 6.94% 2036 bond to trade between 7.42% and 7.47%, after it closed at 7.44% on Wednesday. Bonds have been volatile this week: high oil prices have fuelled bets on more rate hikes by the Reserve Bank of India, while some investors have bought at higher yields. The rupee was at 95.22 per dollar, after touching 94.46 last week.

why it matters

Two factors matter here. Higher oil prices strengthen expectations of tighter policy in India and weigh on the rupee, while the 330 billion rupee ($3.47 billion) bond auction on Friday will show how much risk investors are willing to take. The RBI recently raised its repo rate and signalled room for further tightening, and one-year OIS rates price in 100-125 basis points of hikes over the next year.

market impact

Indian bonds: higher oil and rate-hike bets push yields up, while firmer US Treasuries offer support

• ↔Indian government bonds mixed — support from firmer US Treasuries offset by pressure from high crude prices

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