India bonds may open steady after relief rally from near 7.50% levels

Indian government bonds may open on a relatively stable note on Wednesday, following a surge in buying activity towards the end of the previous trading session. The primary focus will be on the US Federal Reserve's monetary policy decision, which is slated to be announced after Indian market hours. Investors will closely monitor the Fed's guidance on the trajectory of interest rates.

The 6.94% 2036 bond yield is expected to trade within a narrow range of 7.42% and 7.48%, according to a trader at a primary dealership. This comes after the bond's previous closing price of 7.4360%. The 10-year bond yield, on the other hand, saw a significant decline of four basis points on Tuesday, marking its largest single-day drop in three months. This happened as the yield failed to surpass the 7.50% mark, despite several attempts.

The trader explained that the 10-year bond yield was heavily guarded around 7.50%, and its inability to break this level prompted a sharp reversal in the market trend during the final minutes of the trading session. Even though a rate pause is widely anticipated, traders will closely assess the Fed's guidance on the future direction of interest rates.

Meanwhile, oil prices remain relatively stable. The benchmark Brent crude contract is trading near the $115 per barrel mark in Asian hours, close to a six-month high. This surge in crude prices is largely attributed to disruptions in shipping from the Middle East. India, being highly dependent on crude imports for nearly 90% of its needs, faces the risk of a rising energy price impact, which could contribute to inflationary pressures, affect the value of the rupee, and strain government finances.

Earlier this month, the Reserve Bank of India (RBI) increased the repo rate and altered its stance, signaling potential further hikes. Currently, markets are pricing in approximately 125 basis points of rate hikes over the next 12 months, as per overnight indexed swaps.