Indian bonds take a breather before RBI policy outcome

Mumbai witnessed a brief respite in Indian government bonds early Monday, as traders remained inactive before the Reserve Bank of India's policy announcement. The yield on the 6.94% 2036 bond remained steady at 7.2127% at 10:25 a.m. IST, unchanged from Thursday’s close. The market had been closed on Friday for a local holiday. Analysts believe Wednesday's RBI decision is the main driver, with markets anticipating the central bank's first rate hike since 2023.

This comes as global yields surge, Brent crude surpasses $100 per barrel, and major central banks tighten policies following the US-Israeli war on Iran. The US Federal Reserve and Bank of Japan have also raised rates since the conflict began seven months ago. A dip in US yields provides some relief, with the 10-year Treasury yield dropping to 5.26% after briefly reaching a 24-year high on Thursday.

A weaker-than-anticipated US jobs report on Friday has bolstered expectations that the Fed may pause this month. Fed minutes, scheduled for release on Wednesday, could offer further insight into the US rate trajectory. Supply continues to be a major concern in the Indian market. The government plans to issue 3.61 trillion rupees ($37.48 billion) in state bonds between October and December, surpassing market expectations.

Umesh Tulsyan, managing director at Sovereign Global Markets in New Delhi, noted that the substantial supply of 10-30 year SDLs, coupled with elevated long-end government bond issuance, is likely to keep the term premium under pressure. The RBI might also announce additional measures to absorb excess liquidity, such as further open market sales, potentially exacerbating the supply glut.