India bonds seen boxed in narrow range as traders eye fresh triggers

Mumbai: Indian government bonds are set to trade within a tight range on Tuesday, as surging oil prices and higher Treasury yields dampen sentiment, with the central bank's liquidity measures under scrutiny. Analysts anticipate the yield on the benchmark 6.94% 2036 bond to hover between 6.94% and 6.98%, according to a private bank trader.

The yield closed at 6.9607% in the previous session. "Until significant shifts occur in global circumstances or the Reserve Bank of India's liquidity management strategies, the benchmark bond yield is likely to remain confined to a narrow trading range of 3 to 4 basis points," the trader stated. On Tuesday, the RBI is scheduled to run an overnight variable rate reverse repo for 5 trillion rupees ($52.92 billion), following a withdrawal of over 6 trillion rupees from banks via overnight and 30-day VRRR arrangements.

The RBI has been utilizing reverse repos to enable banks to deposit excess funds with it, as the banking system liquidity reached record levels due to massive inflows from the diaspora. Persistent large liquidity surpluses could potentially fuel inflation and hike financial asset prices. Earlier this month, the RBI hinted at forthcoming rate hikes as inflation and growth strengthened.

Meanwhile, oil prices have been elevated, with the benchmark Brent crude contract staying above $97 per barrel. This surge in oil prices has been driven by fresh military tensions between the US and Iran, which have heightened fears of a protracted supply disruption. High energy costs put pressure on import-dependent economies like India and could exacerbate inflationary pressures and strain government finances.

The 10-year US bond yield stood at around 4.78% in Asian trading, with market participants increasing expectations of a 25-basis point hike by the Federal Reserve in the coming week.