Indian bonds tick up on calm oil before Fed verdict

Indian government bonds firmed in early trade on Tuesday as oil prices found a foothold, while traders awaited the US Federal Reserve's policy decision due a day later.

Brent crude slipped about 1% in Asian trade to $114.5 a barrel, consolidating after gaining more than 6% last week.

India's 6.94% 2036 bond yield was down 1 basis point at 7.4732% as of 10:55 a.m. IST. Bond yields move inversely to prices.


Traders remained wary ahead of a 233 billion rupee ($2.45 billion) state-loan auction later in the day, which will test an already shallow appetite for debt.

Demand has especially withered for longer maturities, driving up yields to multi-year highs, as elevated crude prices stoke inflation and fiscal concerns, while both the federal and state governments have prepared duration-heavy borrowing programmes for the coming months.

A frail rupee also weighed on sentiment.

The Indian currency was little changed at 95.22 per dollar on Tuesday, after weakening for three straight sessions, stoking fears that the Reserve Bank of India would need to raise rates further to defend it.

"If crude remains above $100/bbl and the rupee again starts to weaken towards 96, the probability of an inter-meeting hike by RBI cannot be ruled out," said Puneet Pal, fixed-income head at PGIM India Mutual Fund.

The RBI raised its key interest rate and shifted its stance earlier this month, signalling further tightening.

Attention now turns to the Fed decision on Wednesday. While a pause is widely expected, investors remain alert to a potentially hawkish signal on inflation.

Rates

India's overnight indexed swap rates eased after a sharp surge in the previous session.

The 1-year OIS rate eased marginally to 6.65%, but still implied odds of over 100 basis points of rate hikes over the next year.

The 2-year rate fell 1 bp to 6.6850% and the 5-year rate pared 1.5 bps to 6.82%.