Fresh supply to further pinch already weak sentiment for Indian bonds

MUMBAI: Indian government bonds are expected to continue their declining trend in early deals on Friday, with major focus remaining on the demand for the benchmark paper at the auction and the cutoff yield, which will provide more clarity on investor sentiment.

The yield on the benchmark 6.94% 2036 bond is expected to trade between 6.87% and 6.90% till the debt auction, a trader at a private bank said, after closing at 6.8901%, the highest since June 12 in the previous session.

New Delhi will raise 340 billion rupees ($3.56 billion) through the sale of benchmark 2036 paper later in the day, taking its outstanding issuance size to 1.8 trillion rupees.

“There is caution, and this should be clearly reflected in the auction demand today, and a cutoff over 6.90% could realistically open the room for a retest of 7% levels,” the trader said.

The benchmark Brent crude contract ended higher on Thursday, breaking its three-day losing streak, after a Wall Street Journal report said US President Donald Trump is not interested in returning to terms of a memorandum of understanding reached with Iran in June.

The contract was hovering around $90 per barrel, with little clarity on when supply from the key Strait of Hormuz will normalize.

Elevated crude prices affect major energy importers such as India, as expensive oil could fuel inflation and strain the current account and government finances.

Last week, minutes of the Reserve Bank of India’s August monetary policy showed policymakers were open to raising rates if inflation risks materialise.

Market participants also expect the RBI to mop up excess banking-system liquidity through more durable instruments as it positions for tighter policy due to mounting inflation risks.