Indian government bonds are expected to trade in a narrow range in early deals on Tuesday, as elevated oil prices and Treasury yields weigh on sentiment, with the focus remaining on the central bank’s liquidity actions.
The yield on the benchmark 6.94% 2036 bond is expected to move between 6.94% and 6.98%, a trader at a private bank said, after closing at 6.9607% in the previous session.
“Until we see major changes in global factors or the Reserve Bank of India’s plans for liquidity management, the benchmark bond yield is expected to remain squeezed in a shallow trading range of 3 to 4 basis points,” the trader said.
The RBI will conduct an overnight variable rate reverse repo on Tuesday for 5 lakh crore ($52.92 billion), a day after it withdrew over 6 lakh crore from banks through a combination of overnight and 30-day VRRR.
The RBI has been conducting reverse repos to allow banks to park surplus funds with it after banking system liquidity surged to a record high on large diaspora deposit inflows.
Large liquidity surpluses, if sustained, risk raising inflation and boosting financial asset prices. The RBI last month hinted at impending rate hikes as inflation and growth firm up.
Meanwhile, oil prices were elevated, with the benchmark Brent crude contract staying above $97 per barrel, as fresh military escalation between the U.S. and Iran has heightened concerns of a prolonged supply disruption.
Elevated energy prices pressure large importers like India, and a sustained rise could worsen its inflation trajectory and impact government finances.
The 10-year U.S. bond yield was around 4.78% in Asian trading, as the market increased wagers on the likelihood of a 25-bp hike by the Federal Reserve next week.
RATES
India’s overnight indexed swaps are expected to remain rangebound.
The one-year rate ended at 5.9750%, while the two-year rate closed at 6.17%. The five-year rate settled at 6.4625%.
($1 = 94.4850 Indian rupees)