India bonds brace for selloff as RBI sales add to oil pain

MUMBAI: Indian government bonds were set for a sharp selloff on Tuesday as traders returned from a long weekend to a hostile mix of surging oil prices, rising US Treasury yields and the Reserve Bank of India’s planned bond sales to drain excess liquidity.

The benchmark 6.94% 2036 bond may trade in a 7.01%-7.05% range, a private-bank trader said.

It closed at 7.0233% on Friday, up 6 basis points for the week.

Markets were closed on Monday for a local holiday. Brent crude neared $110 per barrel as the Gulf war widened, stoking inflation fears and rattling global debt markets.

The US 10-year Treasury yield tested the pivotal 5% mark, Germany’s 10-year yield has climbed above 3.51%, its highest since 2009, while Japan’s 10-year yield has returned to 3%.

The global bonds selloff has accelerated ahead of the Federal Reserve’s rate decision on Wednesday, as investors braced for a possible hike after data on Friday showed US consumer prices accelerated in August.

For India, the world’s third-largest oil importer and consumer, higher crude prices threaten to stoke inflation, widen the import bill and weaken the rupee, while higher global rates could strengthen the case for domestic rate hikes.

Indian bonds had largely shrugged off global pressures as a banking-system liquidity surplus above 10 trillion rupees limited selling, but that shield cracked on Friday when surging oil prices triggered stop-losses and pushed the 10-year yield above 7% at the close for the first time since June 3.

Sentiment soured further after the RBI said on Friday it would sell 1 trillion rupees ($10.47 billion) of bonds in multiple tranches over the fortnight to drain excess cash.

“Much depends on demand for these bonds and the discount at which the RBI sells them,” the trader said.

“That will dictate how deep the bearishness runs.”

India’s August retail inflation also accelerated, to 4.82%, above the 4.80% Reuters poll forecast and July’s 4.45%.