India bonds gain as oil, Treasuries decline; debt auction remains key

Mumbai witnessed a rise in Indian government bonds on Friday as traders closed out short positions following a drop in oil prices and US Treasury yields. However, this gain was limited before a weekly debt auction that would test the market's appetite for new supply. The benchmark yield for the 6.94% 2036 bond was at 7.2667% by 10:10 a.m. IST, up from 7.2868% the previous day. The upcoming auction of bonds to raise 360 billion rupees ($3.72 billion) will be a key event for the market.

In other news, Brent crude prices dipped slightly from their recent peaks as US President Donald Trump indicated that Washington was holding constructive talks with Iran. Nevertheless, the prices are expected to continue their weekly upward trend, having gained 4% on Thursday. This gain was fueled by a surge in attacks on oil vessels, highlighting the risks for energy-importing countries like India.

The volatility in oil prices could lead to higher oil import bills, strain the current account, and put downward pressure on the rupee. The Reserve Bank of India took note of this situation and raised its policy repo rate by 25 basis points to 5.50%, signaling a "calibrated tightening" stance. This move indicates that the central bank may raise rates further in the future, with most economists predicting a terminal repo rate of at least 6.00% and Standard Chartered Bank estimating it at 6.25%.

The next rate hike is expected in December, with cumulative rate hikes likely to be between 75-100 basis points.