India bonds to edge up on steady US yields, oil prices

Indian government bonds could experience a modest increase on Wednesday, driven by steadier US Treasury yields and oil prices, as investors await clues on the Reserve Bank of India's rate path as expectations of US rate hikes ease. The benchmark 6.94% 2036 bond yield may trade between 7.14% and 7.18% following its close at 7.1628% on Tuesday, according to a private bank trader.

A sustained break below the key 7.15% level could trigger some buying. The 10-year yield was poised for its largest monthly rise, as oil prices stayed above $100 a barrel, US yields hit multi-decade highs, and RBI rate hike expectations intensified, a trader at a primary dealership noted. Some analysts anticipate the RBI to raise rates by up to 100 basis points within a year, as high global yields and oil prices above $100 have dispelled the notion of a sluggish tightening cycle, another trader said.

Traders are preparing for a potential RBI rate hike next week, its first in 18 months, with markets likely to welcome a slight dip in oil prices after a 2.5% drop in the previous session. Brent futures are expected to gain around 14%, the biggest monthly increase since July, at $103 a barrel. The 10-year US Treasury yield slipped 2.5 basis points to 5.23% in Asian hours, declining from a 27-basis-point rise over six sessions.

New York Fed President John Williams suggested Fed policymakers might only need to make one more rate hike this year, with market sentiment shifting, with futures pricing a 53% chance of no Fed rate change by the October-end meeting, as per the CME FedWatch Tool. Overnight indexed swap rates may seek direction from oil and global yields.

On Tuesday, the one-year INR1YMIBROIS=CC rate dropped 5.25 basis points to 6.19%, the two-year INR2YMIBROIS=CC rate fell 8.5 basis points to 6.39%, and the five-year rate INR5YMIBROIS=CC declined 7.25 basis points to 6.65%.