India bonds emerge as top Asian performers as oil, Treasury yields decline

Indian government bonds were the best performers in emerging Asia this week, as a Democratic victory in the US midterm elections sent oil prices and Treasury yields lower, easing pressure on the rupee and prompting investors to scale back bets on aggressive Reserve Bank of India rate hikes.

The benchmark 6.94% 2036 bond yield was at 7.1973% as of 11:40 a.m. IST, up 2.5 basis point on the day but down about 22 bps for the week, set to be its best week since April.

The US 10-year Treasury yield slumped around 10 bps so far this week, burnishing the appeal of high-yielding Indian debt. Indian bonds also outperformed peers in Indonesia, the Philippines, China, Malaysia and Thailand.


Foreign investors returned to the Indian debt market, buying nearly 52 billion rupees($552.28 million) of bonds in their biggest weekly net purchase since July.

"With currency stability, oil prices and global interest-rate expectations remaining key variables, we believe India is increasingly on the radar of global bond investors," said Rohit Agarwal, co-founder of Bequest Capital, a Dubai-based multi-family office.

Indian stocks and the rupee gained from the turn in global sentiment too. The rupee was up nearly 1% at 94.10 per dollar, while the benchmark Nifty 50 index has risen 6.7% to 24,612 on the week.

The US midterm election verdict raised the prospects of a resolution to the Iran war, sending oil prices down 15% in their sharpest weekly fall since April 2020.

The drop in oil prices has taken some heat out of India's inflation outlook, weakening the case for front-loaded policy tightening by the RBI, traders said. India is the world's third-largest oil importer, and lower crude prices also ease trade and fiscal pressures.

"The possibility of an agreement between Iran and the US has boosted the sentiment in the Indian markets," said Alok Singh, head of treasury at CSB Bank in Mumbai.

"Any further downside in the 10-year yield will be seen only if a resolution to Iran crisis is achieved and crude oil prices fall below $90."

Rates

The one-year OIS rate dropped 32 bps this week to 6.40%, the two-year dropped 34 bps to 6.40%, while the five-year rate tumbled 37 bps to 6.49%.

After the selloff in oil prices, market pricing of RBI rate hikes has roughly halved from 125 bps to 50-75 bps, a private sector bank trader said.