Fresh debt supply to provide directional cue for India bonds

MUMBAI: Indian government bonds could see a stable opening on Friday, as market participants await fresh debt supply through the weekly auction, even as elevated oil prices continue to act as a drag, especially for the longer-duration notes.

The yield on the benchmark 6.94% 2036 bond is expected to trade between 6.94% and 6.99%, a trader at a private bank said, after closing at 6.9646% in the previous session.

New Delhi is expected to sell bonds worth 320 billion rupees ($3.39 billion), which includes 210 billion rupees of a new 5-year paper later in the day.

Demand for the shorter-duration debt has improved after way larger-than-anticipated inflows through the central bank’s special schemes.

India’s banking system liquidity surplus has jumped to a record high of 9.7 trillion rupees as of September 3, after Indian banks raised $127.23 billion through a non-resident foreign-currency deposit scheme announced by the Reserve Bank of India.

These funds are anticipated to be utilised towards deployment in the up to 5-year government bonds, especially from foreign banks.

“The demand and cutoff for the new paper would provide an idea about the depth of investor appetite after the spike in rupee liquidity backed by dollar inflows,” the trader said.

Meanwhile, oil prices remain elevated, with the benchmark Brent crude contract staying above the crucial $95 per barrel mark as rising tensions and renewed US-Iran hostilities heightened concerns over Middle East supply risks.

Elevated energy prices pressure large importers like India, as a sustained rise could worsen its inflation trajectory and impact government finances.

The 10-year US yield remained above 4.75% as market wagers on the likelihood of a 25-basis-point hike by the Federal Reserve later this month stood at over 50%, according to the CME FedWatch tool.