India bonds slip after Fed hold; focus shifts to domestic cues

MUMBAI: Indian government bonds fell for a third day on Thursday after the Federal Reserve’s policy outcome clouded the outlook for US interest rates, while investors braced for a large debt auction on Friday and awaited further cues on the domestic rate path.

The Fed held rates steady on Wednesday, but three of its 12 voting members favoured a hike, while Chair Kevin Warsh reiterated his commitment to curb inflation without offering clear guidance on the policy path.

The 10-year Treasury yield was up 10 bps since Tuesday at 4.70%.

Higher US rates can dent the appeal of riskier emerging market bonds.

The benchmark Indian 6.94% 2036 bond yield traded at 6.8178% by 10:50 a.m. IST.

It settled at 6.7964% on Wednesday.

Bond yields move inversely to prices.

“With the Fed’s policy decision broadly meeting expectations, focus is now on the RBI’s rate decision due next week and auction supply,” said Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank.

The central bank is expected to keep its key interest rate unchanged at 5.25%, according to a Reuters poll of economists.

Escalating Gulf tensions and elevated oil prices further posed risks to India’s inflation, fiscal position, current account and the rupee. Brent crude futures rose above $90 a barrel overnight, after attacks in Gulf widened and the United States resumed strikes on Iran on Wednesday.

Foreign investors have also stayed net sellers of FAR bonds so far this week, owning to oil price spikes and no update on India’s inclusion in the Bloomberg index.

Separately, traders braced for New Delhi’s 340 billion rupee ($3.55 billion) large sale of the 10-year note on Friday.