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

Mumbai saw a potential boost for Indian government bonds on Wednesday, as steadier US Treasury yields and resilient oil prices buoyed the market. The benchmark 6.94% 2036 bond yield may trade between 7.14% and 7.18% after closing at 7.1628% on Tuesday, according to a private bank trader. A sustained break below the crucial 7.15% level could trigger buying interest.

The 10-year yield is poised for its largest monthly increase of the financial year, thanks to oil prices staying above $100 a barrel, US yields reaching multi-decade highs, and investors anticipating a more aggressive interest rate path from the Reserve Bank of India (RBI). Some analysts predict the RBI could raise rates by up to 100 basis points within the next year, as elevated global yields and oil prices above $100 dispel concerns of a modest tightening cycle.

Markets are on edge for a possible RBI rate hike next week, marking the first increase since February 2023. Relief could be found in a minor drop in oil prices, with Brent futures currently trading at $103 a barrel, after falling 2.5% in the prior session. Brent is on track for a monthly gain of about 14%, its largest increase since July.

New York Fed President John Williams suggested that Federal Reserve policymakers may only need to implement one more rate hike this year. Market sentiment has softened regarding Fed rate hike expectations, with futures pricing a 53% probability of no change in rates by the Fed during the October-end policy meeting, as indicated by the CME FedWatch Tool.