The benchmark 6.94% 2036 bond ended largely unchanged on Friday at 6.9625%, but added 5 basis points this week, rising a total of 20 bps in three weeks.
Yields move inversely to bond prices.
Indian government bonds have witnessed a third straight week of decline, influenced by escalating oil prices and expectations of global interest rate hikes. Despite some domestic liquidity cushioning the Indian debt market, concerns over inflation and fiscal stability loom large due to rising crude prices. Investors are now keenly awaiting forthcoming inflation data and the outcomes of central bank policy meetings.
The Indian debt market was swept up in a broader global selloff, with the escalating U.S.-Iran conflict and surging crude prices reviving inflation and fiscal worries.
The 10-year U.S. Treasury yield, a benchmark for global borrowing costs, climbed 4 bps this week after pulling back from a three-year high of 6.81%.
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Higher U.S. yields typically make emerging-market assets less attractive to investors.
Brent crude futures climbed more than 6% this week to $95 a barrel. Markets also increased bets on policy tightening globally.India’s overnight indexed swaps now price in roughly 75 bps of rate hikes by the Reserve Bank of India over the next 12 months, though a hike in October seems unlikely, traders said.
Focus is now on India and the U.S. inflation data, followed by the Federal Reserve’s September 11-16 policy meeting.
While global factors have weighed on sentiment, Indian bonds have been cushioned by the RBI’s dollar-attracting measures, which have drawn over $136 billion since June 5, central bank data showed.
Those inflows pushed banking-system liquidity surplus above a record 10 trillion rupees on Thursday. Banks have proposed foreign-exchange sell/buy swaps to gradually drain it.
Market participants have also urged the government to tilt borrowing towards shorter maturities, where banks flush with cash are seeking investment options, three treasury sources said.
As the curve continues to steepen, HSBC Bank said it favours the long-end for the relatively attractive valuations.
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India’s overnight indexed swaps also gained this week.
The one-year rate rose 4 bps to 5.9875%, while the two-year added 5 bps to 6.18%. The five-year rate jumped 3 bps to 6.4650%.