Indian government bonds are
likely to weaken on Monday, as elevated oil prices stoke
inflation worries, adding to pressures from a hawkish central
bank and rate-hike expectations.
The benchmark 6.94 per cent 2036 bond yield may trade
between 7.37 per cent and 7.42 per cent, according to a trader at a primary
dealership, after closing at 7.3789 per cent in the previous session.
Bond yields rise when prices fall.
Brent crude futures fell $1.94, or 1.77 per cent, to $107.92 a
barrel by 0227 GMT after settling at its highest since May 19 on
Friday.
Despite Monday’s pullback, escalating tensions in the Middle
East supported crude oil, even as US President Donald Trump
waived sanctions and tariffs on Russia that may lead to more
Russian fuel exports.
“Rising oil prices are a clear headwind for Indian bonds as
it will further push the central bank to stay hawkish for a
longer period, which will put upward pressure on yields,” the
trader said.
Constantly elevated energy prices hit an import-dependent
India, as they could feed into the nation’s inflation
trajectory, impact the local currency, and destabilise
government finances.
India’s September consumer inflation accelerated to 5.54 per cent,
on track to cross the 6 per cent upper end of the central bank’s
tolerance band in October, according to a majority of economists
polled by Reuters.
Reserve Bank of India Governor Sanjay Malhotra said last
week the central bank may use monetary policy to safeguard
financial stability.
The RBI is expected to tighten financial conditions further
to stem capital outflows and raise the cost of shorting the
rupee, sources and analysts told Reuters.
RATES
India’s overnight indexed swap (OIS) rates are expected to
witness paying pressure, especially at the shorter end.
Last week, the one-year OIS jumped 32
basis points to end at 6.56 per cent; the 2-year rate
closed higher at 6.6225 per cent; and the 5-year
settled at 6.7875 per cent.