India bonds flat, major move likely only after US inflation data

Mumbai witnessed little change in Indian government bonds on Wednesday, as investors held off making significant moves until the release of the latest U.S. inflation data. The local price data had already aligned closely with estimates. Oil prices saw a slight decline to approximately $88 per barrel following reports of a possible extension of a 60-day ceasefire between the U.S. and Iran, set to end on August 17.

The yield on India’s benchmark 10-year government bond settled at 6.7776%, down from 6.7791% at the previous close. Bond yields have an inverse relationship with prices. Meanwhile, India's retail inflation for July increased to 4.45%, up from 4.38% in June, which was higher than the 4.50% forecast in a Reuters poll.

The upcoming U.S. inflation report, due after Indian market hours, is expected to have a greater impact on the markets. A more robust reading than anticipated could signal a more hawkish Federal Reserve stance, potentially driving up Treasury yields. The focus of the Federal Reserve has shifted towards the inflation aspect of its mandate, making the inflation data more significant than the labor market. As the weaker-than-expected non-farm payrolls numbers last week did help, inflation numbers are considered more crucial.

Despite the supportive sentiment for prices due to the dovish guidance from the Reserve Bank of India last week, when it kept its policy rates unchanged, underlying sentiment for prices has remained positive. However, markets are anticipated to show a major reaction to the U.S. data on Thursday, with overnight index swap rates ending largely unchanged on Wednesday. The one-year rate closed at 5.77%, while the two-year rate settled at 5.96%. The liquid five-year rate was recorded at 6.27%.