India bonds to consolidate after selloff as traders digest oil risks

Mumbai, India - Government bonds in India are expected to stabilize on Wednesday, following a two-day sell-off as traders process mounting oil risks and assess the impact of the central bank's swap window withdrawal, according to a private-bank trader. The benchmark 6.94% 2036 bond yield is anticipated to trade between 6.80% and 6.85%, having peaked at 6.8269% on Tuesday. The 10-year US Treasury yield saw a slight drop to 4.69% in Asian markets, which may provide a bit of relief to the market sentiment.

The growing concern over oil prices, with Brent crude futures climbing to $92 per barrel, has exacerbated a global bond selloff and driven up borrowing costs in the US, Germany, and Japan to multi-decade highs. India, being the world's third-largest oil importer, is particularly vulnerable to higher crude prices, which could put pressure on the rupee, economic growth, fiscal metrics, and inflation.

This has led to renewed speculation about potential rate hikes in India, as evidenced by increased bond yields and overnight indexed swaps.

The Reserve Bank of India's (RBI) minutes, which are due later in the day, may offer some clarity, but the geopolitical situation has changed since the previous meeting. Market sentiment has weakened since the RBI accelerated the deadline for its discounted swap facility for banks hedging diaspora deposits, which attracted over $50 billion and bolstered system liquidity.

The private-bank trader advised a cautious approach, suggesting that it's best to remain flexible and wait for developments on the global front before making any significant moves.