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

Indian government bonds experienced an early surge on Friday, as investors shifted positions following a drop in oil prices and a decline in US Treasury yields. However, this upward momentum was halted just before a weekly debt auction, which would assess the market's appetite for new supply. The 6.94% 2036 bond yield was at 7.2667% by 10:10 am IST, down from 7.2868% on Thursday. The upcoming auction aims to raise ₹36,000 crore ($3.72 billion).

Brent crude prices experienced a slight decline from recent peaks following President Donald Trump's announcement that the US was engaged in constructive talks with Iran. Despite this, prices were still on track for weekly gains, having increased by 4% on Thursday. The oil market's heightened risk premium highlights the exposure of energy-importing nations like India, which would face higher oil import costs, strain the current account, and potentially raise the rupee's value.

The Reserve Bank of India (RBI) responded to these market shifts by raising its policy repo rate by 25 basis points to 5.50% on Wednesday and adopting a "calibrated tightening" stance. This move suggests the central bank's readiness to potentially continue increasing rates. Economic analysts now forecast the terminal repo rate to reach at least 6.00%, with Standard Chartered Bank projecting it at 6.25%.

According to Yes Bank, the next rate hike of 25 basis points is expected for December, with cumulative rate hikes ranging between 75-100 basis points.

As traders adjusted positions in response to the oil and Treasury market movements, India's overnight indexed swap rates declined. The one-year OIS rate stood at 6.24%, the two-year rate at 6.44%, and the liquid five-year rate fell by 6 basis points to 6.72%.