Indian government bonds gained slightly in early trade on Tuesday as oil prices steadied, while traders waited for the US Federal Reserve's policy decision on Wednesday, according to a Reuters report carried by The Economic Times.
The numbers
- The yield on the benchmark 6.94% 2036 bond fell 1 basis point to 7.4732% at 10:55 am. Bond yields move in the opposite direction to prices.
- Brent crude slipped about 1% to $114.5 a barrel, after rising more than 6% last week.
- The rupee was little changed at 95.22 per dollar after weakening for three sessions in a row.
Why traders are nervous
Demand for long-term bonds has dried up, pushing their yields to multi-year highs, as high crude prices raise worries about inflation and government finances. Both the Centre and the states plan heavy long-term borrowing in the coming months. A ₹23,300 crore state loan auction later on Tuesday was set to test that weak demand.
The weak rupee has also raised fears that the Reserve Bank of India will need to raise rates further to defend it. The RBI raised its key rate earlier this month and signalled more tightening.
"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, head of fixed income at PGIM India Mutual Fund.
What markets expect
Overnight indexed swap rates, which reflect rate expectations, eased after a sharp rise on Monday. The one-year rate was at 6.65%, still pricing in more than 100 basis points of rate hikes over the next year.
The Fed is widely expected to pause on Wednesday, but investors are watching for any hint of tougher action on inflation.
This article is for information only and is not investment advice.