India bonds rise on oil drop; profit-taking limits gains

MUMBAI: Indian government bonds edged higher on Thursday, though profit-taking erased most of the early gains triggered by oil prices falling to pre-war levels.

The yield on the benchmark 6.94% 2036 bond closed 1.4 bps lower at 6.7690%, after falling to an intraday low of 6.7488%. Bond yields move inversely to prices.

The 10-year yield fell 10 basis points across the last three sessions, with half of that decline coming on Wednesday.

“Traders cashed in gains after the 10-year yield failed to fall below 6.75%, a key psychological level,” a private-bank trader said.

Traders stayed cautious ahead of a long weekend, with the bond market closed on Friday.

Brent crude fell to $72.24 a barrel as shipping through the Strait of Hormuz resumed, while Bandhan Mutual Fund said the drop in prices challenged expectations that post-war inventory

 rebuilding would keep oil prices elevated.

“This has led to expectations on both inflation and government subsidy bill being scaled down.”

Investors have also scaled back expectations of higher rates after RBI Governor Sanjay Malhotra said it was “premature” to talk about rate hikes.

Overseas investors have ramped up purchasing Indian government bonds after RBI’s policy sweeteners and New Delhi’s tax cuts, buying a net of $2.5 billion rupees in June so far.

Focus is now on El Niño’s impact on India’s monsoon rains.

Till June 19, cumulative rainfall was 40% below long-term average while weekly rainfall was 62% below long-term average, according to Kotak Mahindra Bank.

“June and July inflation prints will be crucial to have a view on the interest rate trajectory,” a foreign bank rates trader said.

Rates

Indian OIS rates ended mixed, with some opportunistic paying in long-term rates after recent decline.

The one-year OIS rate ended 1 bp down at 5.76%, while the two-year rate closed slightly lower at 5.9050%. The five-year rate rose slightly to 6.18%.