India bonds seen under strain before Fed decision as oil, global yields rise

Indian government bonds may experience a decline early Wednesday as surging crude prices and elevated global yields dampen demand prior to the U.S. Federal Reserve's decision, according to market observers. A rate increase is anticipated to bolster expectations of further tightening by the Reserve Bank of India (RBI), following persistent inflation.

The benchmark 6.94% 2036 bond yield is anticipated to fluctuate between 7.05% and 7.12%, private-bank sources suggest. On Tuesday, the yield settled at 7.0727%, its highest level in four months. Sentiment has also soured ahead of the RBI's scheduled open market operations (OMOs), which traders view as a potential strain on the already precarious supply-demand equilibrium.

The RBI plans to issue 1 trillion rupees ($10.42 billion) in bonds over three installments commencing Thursday. "We have opened a can of worms; OMO sales are adding to the supply at an uncertain time, when there is no confidence to buy," remarked a private-bank trader. Brent crude futures soared 3.5% to $108 a barrel in Asian trading as conflict escalated in the Middle East.

U.S. Treasury yields marginally retreated after touching multi-decade peaks in the prior session. On Tuesday, the 10-year U.S. Treasury yield briefly surpassed 5%, its highest level since the 2008 financial crisis. The Group of Seven (G7) average 10-year yield climbed to 4.285%, the highest since mid-2008. In domestic markets, analysts are sharpening their forecasts for an RBI rate hike in October following the August annual Consumer Price Index (CPI) inflation surge to 4.82% from 4.45% in July.

Deutsche Bank has advanced its rate hike prediction to October, citing the impending Federal Reserve tightening cycle.