Indian bonds dip on oil pain; ample cash curbs sales
The benchmark 6.94% 2036 bond yielded 6.9525% as of 11:10 a.m. IST, after closing at 6.9431% on Tuesday
Indian government bonds dipped early on Wednesday due to rising oil prices and inflation concerns, though ample banking liquidity restricted selling. The benchmark 6.94 percent 2036 bond yielded 6.9525 percent at 11:10 a.m. IST, after closing at 6.9431 percent on Tuesday. Oil prices reached $100 a barrel in Asian trading as tensions between Washington and Tehran escalated their six-month conflict.
As the world's third-largest oil importer and consumer, India is particularly susceptible to oil fluctuations. The country's debt market now confronts a dual challenge: surging oil prices dampen demand by fueling rate hike apprehensions, while vast liquidity reserves constrain aggressive selling. India's banking sector liquidity reached a record ₹11.16 trillion ($117.30 billion) on Sunday, thanks to larger-than-anticipated inflows from RBI's dollar-attracting measures, and has only slightly decreased since then.
"People can't sell with so much liquidity in hand," remarked Alok Singh, head of treasury at CSB Bank in Mumbai. Banks have primarily deployed these funds into shorter-tenor instruments such as VRRRs, T-Bills, CPs, and CDs, while some are making opportunistic trades for short-term gains. Some relief has arrived from the RBI's decision to proceed with temporary liquidity withdrawal through variable rate reverse repos instead of aggressive steps that could further harm the bond market sentiment.
Investors are hesitant to make definitive decisions until they can assess the sustainability of oil's rally and receive clearer guidance on the US and Indian rate paths. The Federal Reserve's policy decision is scheduled for next week, with U.S. inflation data expected later this week, and India's reading also slated for next week.
A rise in oil prices also led to an increase in India's overnight indexed swap rates. The one-year rate rose 1.75 basis points to 5.97 percent, the two-year rate jumped 2.75 basis points to 6.1650 percent, and the five-year rate added 2 basis points to 6.46 percent.
Written by urgent.news from Hindu BusinessLine's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.