Indian bonds slip as crude hovers near $90

Mumbai saw a dip in Indian government bonds on Tuesday, as Brent crude prices flirted with the $90 mark following stalled U.S.-Iran talks, and traders awaited July inflation data to gauge the Reserve Bank of India's rate trajectory. Brent oil prices climbed 5% on Monday, rebounding from their loss on Monday but settling at $87.7.

This surge in oil prices could fuel inflation, burdening India's fiscal situation, current account and currency reserves, given that the country is the world's third-largest crude importer. The benchmark yield on 6.94% 2036 Indian bonds surged by 1.5 basis points to 6.7791%, marking the largest one-day increase in over a week. Private bank traders noted a slight influx of value buying in the bond market, as the 10-year yield held steady above the 6.80% threshold.

Investors are now holding their breath for the U.S. and India's inflation data, due out on Wednesday. With the U.S. facing rising price pressures, the probability of a September Federal Reserve rate hike climbed to 51% from 44% a day earlier. To counter this, the liquidity in the banking system, bolstered by the Reserve Bank of India's diaspora deposit scheme, kept demand for bonds, particularly those with shorter maturities, afloat.

"The short end of the yield curve should continue to be supported by surplus banking system liquidity and reduced issuance of certificate of deposits by banks as foreign inflows remain strong," remarked Puneet Pal, head of fixed income at PGIM India Mutual Fund. Foreign investors also jumped in, buying nearly 17 billion rupees worth of the 7.34% 2064 bond in the week leading up to Tuesday.

Overnight index swaps in India also shot up, mirroring the uptick in oil prices. The one-year rate closed at 5.79%, up 1.25 basis points, and the two-year rate surged 4.75 basis points to 5.9850%. The five-year rate ticked up 3.75 basis points to 6.2925%.