Treasury rally could lift India bonds at open, but caution prevails

Indian government bonds could see some buying interest in early deals on Thursday, tracking a drop in US Treasury yields, but any such move is likely to be limited as underlying sentiment remains cautious after the Reserve Bank of India's hawkish commentary earlier this week.

The benchmark 6.94% 2036 bond yield may trade between 7.37% and 7.42%, according to a trader with a primary dealership, after closing at 7.3999% in the previous session. Bond yields rise when prices fall.

"With yield around 7.40%, we could see some bulls becoming active, but any broad moves can be ruled out," the trader said.


US Treasuries rallied sharply on Wednesday, with yields staying lower in Asian hours, reversing an earlier selloff spurred by the latest hot inflation report.

The turnaround highlighted an increasingly vigorous debate in the market, centering on accelerating consumer price data on the one hand and a string of comments from Federal Reserve officials on the other suggesting policymakersare not in a rush to hike further.

Data showed the Consumer Price Index rose 0.6% last month after climbing 0.4% in August.

The odds of another Fedrate hike in October stand at one in three, while pricing on a similar move at the December meeting spikes to 93%.

India's September consumer inflation accelerated to 5.54%, set to cross the 6% upper end of the central bank's tolerance band in October, according to a majority of economists.

Reserve Bank of India Governor Sanjay Malhotra said in a media interview on Tuesday that while the central bank does not generally use monetary policy to safeguard financial stability, the two cannot be fully separated, raising bets of more hikes.

Rates

India's overnight indexed swap (OIS) rates could see marginal declines after a sharp spike in the previous session.

The one-year OIS rate rose 10.25 bps to 6.4375%, while the two-year rate climbed 8 bps to 6.5950%, and five-year rate jumped 4.75 bps to 6.7925%.