India bonds give up day's gains as oil price spike adds to rate hike fears

Indian government bonds gave up their gains to end lower at the start of a holiday-shortened week on rising bets of a domestic rate hike as oil prices spiked and fanned inflation fears.

The benchmark 6.94% 2036 bond yield ended at 7.3920%, after closing at 7.3789% in the previous session. Indian debt markets will remain shut on Tuesday for a local holiday.

Bonds had risen earlier in the day, with the 10-year yield easing to 7.35%, as decline in Treasury yields triggered value purchases. Bond yields move inversely to prices.


India's 10-year benchmark bond yield has risen for a record nine consecutive weeks, climbing a total of 62 basis points.

"We believe the RBI's next policy move could be a 50 bps rate hike... whether this materializes at the scheduled MPC meeting or earlier will largely depend on the trajectory of the Indian Rupee, which, in turn, is likely to be influenced by movements in crude oil prices," said Puneet Pal, head of fixed income at PGIM India Mutual Fund.

The benchmark Brent crude contract hovered at around $108 per barrel, after hitting $110 on Friday for the first time since May.

Persistently expensive crude is a negative for Indian fixed-income markets as it could widen the trade- and current-account deficits, place renewed pressure on the rupee and add to domestic inflation.

India's September consumer inflation accelerated to 5.54%, and is on track to cross 6%, the upper end of the central bank's tolerance band, in October, economists said.

Reserve Bank of India Governor Sanjay Malhotra said last week that India's recent foreign-exchange measures were aimed at curbing currency speculation, and while the central bank does not generally use monetary policy to safeguard financial stability, the two cannot be separated.

RATES

India's overnight indexed swap (OIS) rates recovered from the day's lows to end little changed.

The 1-year OIS ended at 6.53%, the 2-year rate ended at 6.60% and the 5-year rate settled at 6.78%.