India bonds to stay hemmed in by oil, Treasury moves ahead of inflation data

Indian government bonds are likely to trade in a narrow range on Thursday, wedged between softer oil prices and rising US yields, while investors await domestic inflation data that could reshape expectations for the Reserve Bank of India's rate path.

The benchmark 10-year US Treasury yield neared 5% in Asian trade after October consumer-price data outstripped forecasts, spurring traders to ramp up bets on a larger Federal Reserve rate increase in December.

Markets await India's October inflation reading later in the day, with a Reuters poll forecasting annual consumer inflation at 5.93%, up from 5.54% in September. An upside surprise could entrench expectations of further RBI tightening next month.


Softer crude may provide some relief. Brent fell 1% in Asian trade to $91.80 a barrel, easing pressure on oil-importing India's inflation outlook, currency and public finances.

The benchmark 6.94% 2036 bond yield is expected to move between 7.18% and 7.23%, according to a private-bank trader. It ended at 7.2139% on Wednesday after rising 6 basis points, its steepest single-day climb in a month.

Volumes were thin on Wednesday as investors stayed on the sidelines ahead of Friday's 340-billion-rupee auction of the benchmark 10-year bond, a hefty supply test that could gauge investor appetite.

"The best time to take positions would be after Friday's auction, once uncertainty around CPI, the RBI's rate path and investor appetite has cleared," an asset-manager trader said.

The RBI, which raised its key rate in October for the first time in nearly four years, is expected to deliver another 25 bps of tightening in December. Some traders are also positioning for a 50-bp increase.

RATES

Overnight index swap rates may continue to firm alongside US yields.

The 1-year, 2-year and 5-year OIS rates gained 8 to 9 bps on Wednesday to 6.3950%, 6.39% and 6.4825%, respectively.