Indian bonds set for selloff as US yields, oil prices fuel rate hike bets

Indian government bonds are expected to experience a significant sell-off in early trading on Thursday, following a sharp increase in US Treasury yields and oil prices. This has led to speculation that the local central bank may adopt a more hawkish stance during its upcoming monetary policy meeting. The benchmark 6.94% 2036 bond yield is anticipated to trade within a range of 7.05% to 7.10%, according to a trader with a primary dealership.

This comes after the yield ended at 7.0447% on Wednesday. The bullish sentiment that had been present at the beginning of the week has now been reversed, and the 7.10% level appears to be an upside support. The surge in US Treasury yields was driven by a stronger-than-anticipated purchasing managers report, which has heightened inflation fears.

Oil prices also climbed on Wednesday due to Iran's President Masoud Pezeshkian declaring that he will never capitulate, following Donald Trump's warning that he might annihilate Iran. As India relies on foreign crude oil for about 90% of its energy needs, fluctuations in global oil prices pose a substantial risk, exacerbating inflation concerns and anticipating a potential interest rate hike within the next two weeks.

Market participants are increasingly considering policy tightening as the Reserve Bank of India's monetary policy decision is scheduled for October 7, with many expecting a repo rate hike. Overnight indexed swap rates have been trending upward in tandem with bond yields.