India bonds end tad higher on softer oil

Indian government bonds ended marginally higher on Tuesday, with the 10-year bond hovering near a one-month high, buoyed by softer oil prices, though caution before US midterm elections and profit booking capped gains.

Brent crude plunged more than 7% on Monday to $104.80 a barrel after talks between Iranian and Qatari officials rekindled hopes of a peace deal and steadier Middle East supplies. It rebounded to around $106 on Tuesday after reports that the United States struck Iran's Qeshm Island.

As the world's third-largest oil importer, India is especially vulnerable to elevated crude prices, which can stoke inflation, undermine the rupee and cloud the fiscal outlook.


Traders are also recalibrating expectations for the Reserve Bank of India's rate path, as softer oil could temper domestic inflation risks and ease pressure on debt markets globally.

The benchmark 6.94% 2036 bond yield dropped 1 basis point to 7.3012%, its lowest since October 9. It dropped nearly 10 bps in the previous session, in its biggest one-day decline since early April.

The yield briefly touched a low of 7.2780% before profit booking trimmed gains.

"7.25% on the 10-year yield is the next crucial level, which if breached, may lead to 7.15%," said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank, adding that the US midterms and their impact on the US-Iran conflict and crude trajectory will decide further moves in bonds.

Investors are closely watching the US midterm elections, which will determine whether Republicans retain control of Congress during Trump's final two years in office or cede majority control to Democrats, an outcome that could have a bearing on the US-Iran war.

RATES

India's overnight indexed swap rates declined as falling oil revived receiving interest.

The one-year OIS fell 3 bps to 6.63%, the two-year eased 3.75 bps at 6.64%, and the five-year dropped 5 bps to 6.7275%.