Indian bonds drift as US debt rout saps oil relief before CPI

Indian government bonds were confined to a narrow range early on Thursday, with softer oil prices offsetting a rise in US Treasury yields ahead of key domestic inflation data and debt supply.

The benchmark 6.94% 2036 bond yield was little changed at 7.2183% at 10:30 a.m. IST, after posting its sharpest one-day fall in a month on Wednesday.

Markets await crucial consumer inflation data, which could reset expectations for the Reserve Bank of India's rate path. A Reuters poll forecasts October annual inflation at 5.93%, up from 5.54% in September.


The RBI raised rates in October for the first time in nearly four years and shifted to a "calibrated tightening" stance, and is widely expected to raise its policy rate by 25 basis points in December.

An upside surprise in inflation could spur bets on a 50-basis-point rate hike next month, traders said.

Traders are closely watching headlines on the Iran war and their impact on oil prices after a Democratic sweep in US midterms raised hopes of a resolution.

Oil prices have retreated from $117 per barrel before US midterms to $91 per barrel, supporting sentiment for oil-import-dependent India.

"Trump losing the midterms is positive for markets, but we need to see how the US-Iran war develops," said a trader at a private bank. "With oil prices easing, the RBI may not need to hike as aggressively as was feared a few weeks ago."

Still, the backdrop remains fragile.

The benchmark 10-year US Treasury yield neared 5% after October US inflation exceeded forecasts, prompting investors to raise bets on a larger Federal Reserve rate increase in December.

New Delhi's 340-billion-rupee auction of the 10-year note on Friday will also be a key test of demand, traders said.

RATES

Overnight index swap rates were subdued ahead of the inflation data.

The 1-year and the 2-year rate were not yet traded. The 5-year OIS rate was down slightly at 6.48%