India bonds to consolidate after selloff as traders digest oil risks

MUMBAI: Indian government bonds are likely to consolidate on Wednesday, after a two-day selloff, as traders digest mounting oil risks and the impact of the central bank’s swap window pullback while watching the August policy minutes for fresh rate cues.

The benchmark 6.94% 2036 bond yield is expected to trade between 6.80% and 6.85%, a private-bank trader said, after closing at a two-week high of 6.8269% on Tuesday.

The 10-year US Treasury yield eased marginally to 4.69% in Asian trade, which may offer some relief to sentiment.

Brent crude futures scaled higher to $92 per barrel on Wednesday, after US President Donald Trump said no talks were taking place with Iran and insisted the Strait of Hormuz was open, while Iran asserted that the critical waterway remained shut.

The conflict has fuelled a global bond selloff, pushing long-term borrowing costs in the United States, Germany and Japan to multi-decade highs on Tuesday as investors fretted over geopolitical risks and expanding government debt.

For India, the world’s third-largest oil importer, higher crude prices threaten the rupee, the country’s economic growth, fiscal metrics and inflation.

Elevated US yields also erode the appeal of emerging-market debt.

Domestic speculation over possible rate hikes has also resurfaced, reflected in higher bond yields and overnight indexed swaps, traders said. The RBI minutes due later in the day may offer guidance, although the geopolitical backdrop has shifted since the meeting.

Sentiment has weakened since the RBI brought forward the deadline for its discounted swap facility for banks hedging diaspora deposits, which has drawn over $50 billion and bolstered system liquidity.

“Best to stay light and see what happens on the global front before taking decisive positions,” the private-bank trader said.