India bonds gain as oil, Treasuries decline; debt auction remains key

MUMBAI: Indian government bonds rose in early trade on Friday as traders covered short positions following a decline in oil prices and US Treasury yields, though gains were capped ahead of a weekly debt auction that will test demand for fresh supply.

The benchmark 6.94% 2036 bond yield was at 7.2667% as of 10:10 a.m. IST, after ending at 7.2868% on Thursday.

New Delhi will raise 360 billion rupees ($3.72 billion) through sale of bonds. Benchmark Brent crude prices eased slightly from recent highs after US President Donald Trump said Washington was engaged in productive discussions with Iran.

However, prices remained on track for weekly gains after Brent settled 4% higher on Thursday, driven by a rise in attacks on vessels.

The renewed risk premium in oil markets underscores the vulnerability of energy-importing economies like India, as sustained higher crude prices would raise oil import bill, put pressure on the current account and the rupee.

More importantly for monetary policy, an extended oil-price shock could lift headline inflation beyond the direct impact on retail fuel prices.

Against that backdrop, the Reserve Bank of India on Wednesday raised its policy repo rate by 25 basis points to 5.50% and changed its policy stance to “calibrated tightening”.

The shift signals that the central bank is prepared to potentially deliver further rate increases.

Most economists now expect terminal repo rate to reach at least 6.00%, while Standard Chartered Bank sees it at 6.25%.

“The next hike of 25 bps is anticipated for December while cumulative rate hikes are likely at 75-100 bps,” Yes Bank said in a note.