Indian government bonds fell for a third day on Thursday after the Federal Reserve’s policy
outcome clouded the outlook for U.S. 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.
RATES
India’s overnight index swap rates surged tracking higher U.S.
yields.
The one-year rate was up 1 bp at 5.94%,
while the two-year rate rose 3.5 bps to 6.15%.
The five-year rate jumped 5.5 bps to 6.46%.