Indian government bonds edged
lower early on Wednesday as rising oil prices stoked inflation
concerns, though ample banking liquidity limited selling.
The benchmark 6.94 per cent 2036 bond yielded 6.9525 per cent
as of 11:10 a.m. IST, after closing at 6.9431 per cent on Tuesday.
Bond yields move inversely to prices.
Brent crude futures marched toward $100 a barrel in Asian
trading as Washington and Tehran stepped up strikes, sharply
escalating their six-month-old war.
India is the world’s third largest oil importer and
consumer, and is highly vulnerable to oil swings.
The country’s debt market now faces a double bind: oil’s
surge is dimming demand by fanning rate-hike fears, while a
massive liquidity glut needs to be deployed, limiting room for
aggressive selling.
India’s banking system liquidity swelled to a record ₹11.16
trillion ($117.30 billion) on Sunday, due to
larger-than-expected inflows from RBI’s dollar-attracting
measures, and has eased only marginally since then.
“Poeple can’t sell with so much liquidity in hand,” said
Alok Singh head of treasury at CSB Bank in Mumbai.
Banks so far have been deploying these fund in shorter-tenor
instruments such as VRRRs, T-Bills, CPs and CDs, and five-year
government bonds, traders said, while some are sticking to
oportunistic trades for short-term gains.
Some relief has come from the RBI’s decision to stick to
temporary liquidity withdrawal through variable rate reverse
repos and not aggressive steps that could further dent bond
market sentiment.
Investors said they are also reluctant to make decisive
calls until they could judge the durability of oil’s rally and
get firmer guidance on US and Indian rate paths.
The Federal Reserve’s policy decision is due next week, with
U.S. inflation data expected later this week and India’s reading
also scheduled for next week.
RATES
A fresh oil-price spike also sent India’s overnight indexed
swap rates higher.
The one-year rate rose 1.75 bps to 5.97 per cent,
while the two-year rate jumped 2.75 bps to
6.1650 per cent. The five-year rate added 2 bps to
6.46 per cent.