India bonds may firm with Treasuries; crude, supply could cap gains

Mumbai witnessed fluctuations in Indian government bonds on Thursday, as they were influenced by US Treasuries and other market factors. The US Federal Reserve maintained interest rates without change on Wednesday, surprising no one, and delayed any action until after the upcoming US midterm elections, while waiting for more inflation data. The 10-year US Treasury yield, a crucial indicator of global borrowing costs, dipped 6 basis points to 4.98% in Asian trade following the Fed's decision.

The 2036 Indian government bond, currently yielding 7.44%, is expected to trade between 7.42% and 7.47%. Bond prices and yields are inversely related, meaning when prices drop, yields rise. Investors have been uncertain due to high oil prices, which have driven speculation of additional Reserve Bank of India rate hikes. However, there have been signs of cautious optimism as some investors have started buying bonds despite the higher yields.

The 10-year yield neared but did not surpass the critical 7.50% level, suggesting that yields might peak near their current levels if oil prices stabilize. Traders are concerned about the current oil situation, fearing that if it doesn't improve, it could lead to further depreciation of the rupee, potentially prompting another rate increase in December. Currently, the rupee is trading at 95.22 per dollar, down from 94.46 a week ago.

The Reserve Bank of India (RBI) increased the repo rate and adjusted its policy stance earlier this month, indicating potential for further tightening. On Friday, New Delhi will hold a $3.47 billion bond auction, which could provide more insights into investor demand and the broader risk appetite.