Oil tumble to support Indian bonds; RBI policy guidance stays large driver

Indian government bonds were poised to open higher on Wednesday as falling oil prices bolstered inflation expectations ahead of the Reserve Bank of India's policy decision, according to traders. The 6.94 percent 2036 bond yield was projected to hover between 6.80 percent and 6.83 percent until the central bank's guidance at 10 a.m. IST, after closing at 6.8152 percent the previous day.

The Reserve Bank of India is anticipated to maintain its key interest rate, as per a Reuters poll, with economists not expecting a hike in 2026. This decision would contrast with many global peers, as inflation remains tame despite elevated oil prices, and monetary policy measures have attracted substantial rupee inflows. While a rate change is expected, the policy statement's content will be the pivotal factor, following retail inflation surging to 4.38 percent in June, surpassing the RBI's 4 percent target.

The sharp decline in oil prices has turned the tides in favor of bond investors, which should be discernible in today's price movements, according to a trader. Brent crude plunged 5.2 percent on Tuesday, adding to its over 7 percent fall on Monday, and was trading under $80 per barrel in Asian hours. The drop in oil prices, following remarks by Qatari and U.S. officials, pointed towards a potential diplomatic breakthrough in the Iran war, which could alleviate oil supplies via the Strait of Hormuz.

India, a major crude importer, benefits from lower prices, improving its inflation outlook and current account deficit. Overnight index swap rates for India are expected to decline in early trading, with significant shifts likely following the central bank's remarks. The one-year swap rate closed at 5.8675 percent on Tuesday, while the two-year rate ended at 6.0575 percent. The five-year OIS rate settled at 6.3550 percent.