India bonds tiptoe along ahead of Fed meet; oil prices weigh

Indian government bonds traded range-bound early Wednesday, as investors grew wary of building positions before the Federal Reserve's rate decision and as oil prices climbed.

The benchmark 6.94% 2036 bond yield was at 6.7872% by 11:00 a.m. IST, after ending Tuesday at 6.7774%. Bond yields move inversely to prices.

The Fed's ‌decision is ⁠due post ⁠market hours, with traders assigning a 65% probability to rates being held steady, while fully pricing in a 25-basis-point hike in September. The 10-year Treasury yield also inched up to 4.61%.


Indian bond traders said they will closely watch for guidance on the Fed's rate path for the rest of the year, as higher U.S. rates may influence domestic rates. The Reserve Bank ⁠of India's ‌policy decision is due next week, and policymakers are likely to keep the key repo rate unchanged at 5.25%, according to ⁠a Reuters poll of economists.

India's financial conditions have tightened recently, returning to levels seen at the June MPC meeting, as re-escalation in Middle East fighting and the accompanying surge in oil prices have outweighed the impact of RBI's policy measures, according to economists at Barclays.

"We expect the RBI to maintain its neutral stance and leave rates unchanged on August 5," they said in a note.

Brent crude rose ‌4.7% in Asian trade to $87.68 a barrel after U.S. and Saudi forces launched strikes on Iran-backed groups in Iraq, reviving concerns about the Gulf conflict and its ⁠impact on the global economy.

India's economic growth is expected to slow sharply this fiscal year from last year's strong expansion, a Reuters poll showed, while inflation has risen for eight straight months to 4.38%, surpassing the central bank's 4% medium-term target.

RATES

India's overnight index swap rates climbed before the Fed meeting.

The one-year swap rate was up 3.25 bps at 5.9150%, while the two-year rate added 2.25 bps to 6.09%.The five-year rate was 3.25 bps higher at 6.3825%.