India bonds may edge up as oil remains steady despite US sanctions on Iran

Indian government bonds are likely to see a modest rise in early trading on Tuesday following a steep drop the previous day, as oil prices held steady despite stiffer US secondary sanctions on Iran. The yield on the benchmark 6.94 percent 2036 bond is anticipated to trade between 6.84 percent and 6.87 percent, according to a trader at a private bank.

It closed at 6.8708 percent on Monday. Some recovery in bonds could occur, as oil has not moved higher after the sanctions, but overall, the benchmark yield is expected to remain near the 6.85 percent mark, the trader said. US Treasury Secretary Scott Bessent announced an expansion of sanctions to sever Iran's economic lifeline, urging nations to sever ties with Tehran or face exclusion from the dollar-based financial system.

He did not specify which countries would be targeted. Analysts believe that since the United States is concentrating on economic matters, the immediate risk to oil supplies from the Middle East is unlikely. Brent crude prices remain around $92 a barrel. Higher oil prices impact major energy importers like India, potentially fueling inflation and straining the current account and government finances.

The Reserve Bank of India's August monetary policy minutes indicated that policymakers were open to raising interest rates if inflation risks materialize and broaden. Governor Sanjay Malhotra stated that evidence of spillovers could warrant policy tightening, while Deputy Governor Poonam Gupta hinted at a possible hike this year.

Traders also expect a fresh supply of the benchmark bond, due on Friday. The Indian debt market is closed on Wednesday for a local holiday. Overnight indexed swap rates are expected to consolidate near current levels after a sharp spike last week. The one-year rate ended at 5.92 percent on Monday, the two-year rate closed at 6.1350 percent, and the five-year rate settled at 6.45 percent.