India bonds reverse gains as report RBI mulling rate hike outweighs external support

Indian government bonds erased early advances on Thursday, as a report stating that the central bank is mulling a rate hike to control the rupee's decline overshadowed positive global cues.

The benchmark 6.48% 2035 bond yield was at 7.1225%, as of 10:15 a.m. IST, rocketing back up from a ‌low of 7.0194% ⁠hit earlier, ⁠and against its previous close of 7.0761%. Bond prices move inversely to yields.

"The report has caught the bond market completely off guard, triggering an immediate reassessment of the rate outlook and wiping out the early gains," trader with a state-run bank said.


The Reserve Bank of India (RBI) is considering all options to stabilize the rupee, including an interest rate hike, Bloomberg News reported on Thursday, citing ⁠people familiar ‌with the matter.

Indian rupee has been one of the worst performing Asian currencies, dropping dropped over 6% against the U.S. dollar since U.S.-Iran war ⁠started on February 28.

It had plunged for the last nine consecutive sessions, including hitting multiple record lows, prompting the central bank to intervene strongly, which also impacts rupee liquidity.

The central bank will conduct a three-year dollar/rupee buy/sell swap auction of $5 billion on May 26, which will lead to an infusion of around 475 billion rupees.

Bonds had started the session on a positive note as oil prices fell and U.S. President ‌Donald Trump said that negotiations with Iran were in the final stages, even as investors remained wary about the outcome as disruption to supply continued.

The benchmark Brent crude ⁠contract declined to around $105 per barrel, and easing oil prices also pulled U.S. Treasury yields lower, pushing the 10-year yield down by 10 basis points to around 4.57%.

RATES

India's overnight index swap rates jumped on reports about discussion over a rate hike from the central bank.

The one-year swap was at 6.31%, while the two-year rate jumped to 6.57%, both up by over 10 bps from previous close. The five-year rate was largely steady around 6.80%.