India bonds hemmed in by oil worries ahead of inflation data

Synopsis

On Wednesday morning, Indian government bonds exhibited limited fluctuations due to high oil prices and anticipation of inflation data. The market reacted cautiously as hopes for peace in the Middle East dwindled following recent maritime incidents. Investors remain attentive to domestic and US inflation indicators, which will likely influence future interest rate decisions, keeping bond yields tethered amidst global rate anxieties and deposit growth.

Indian government bonds were hemmed in a tight range early on Wednesday, as elevated oil prices restrained risk appetite ahead of U.S. and local inflation data.

The benchmark 10-year bond yield was little changed at 6.7822% as of 11:45 a.m. IST.

Hopes of ending the Middle East war frayed on Tuesday, after the ‌United States ⁠and Yemen's ⁠Iran-aligned Houthis reported fresh shipping attacks, while Tehran said the Strait of Hormuz will remain shut ​unless Washington meets its demands.

The benchmark Brent crude contract was last up 0.8% at $89.6 per ​barrel, after climbing 6.5% over the last two sessions.

Costlier crude weighs on Indian bonds as it risks stoking inflation and straining the finances of the ​oil-importing economy.

Focus is now on local and U.S. ⁠inflation data ‌for direction on interest rates.

India's retail inflation print is due ​at 4 ​p.m. IST, with a Reuters poll forecasting July inflation at ⁠4.50%, up from 4.38% in June. U.S. data is due ​after Indian market hours.

At home, expectations of further rate hikes by the Reserve Bank of India have eased since it left rates unchanged last week and lowered its inflation forecasts.

A hotter-than-expected U.S. inflation reading, however, could boost Federal Reserve hike bets, pressuring Indian rates by narrowing the yield premium over U.S. bonds. "The 10-year yield remains locked in a 6.76%-6.80% ‌range, and it is very difficult to break either side, with fears of higher global rates and robust foreign currency deposit flows offsetting ​each other," ​a private-bank trader ⁠said.

The RBI's diaspora deposit scheme to attract foreign inflows has brought in over $36.7 billion as of July 17, RBI data showed.

The inflows, coupled with government spending, have ​pushed up India's daily average cash surplus to over 3 trillion rupees in August.

India's overnight index swap rates inched up as oil-led caution weighed on sentiment.

The one-year rate was up about 1 bp at 5.80%, while the two-year rate was flat at 5.98%. The liquid five-year rate rose 1.25 bps to 6.3050%.

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