India bonds poised to gain as oil slips; US midterms in focus

MUMBAI: Indian government bonds are expected to open higher on Monday, as lower crude prices alleviate inflation and concerns about rate hikes, according to traders. The benchmark 6.94% 2036 bond yield is anticipated to trade between 7.35% and 7.39%, following its close at 7.4139% on Friday. The 10-year yield declined by approximately 6 basis points last week, after a staggering 70 basis point increase over the previous 10 weeks, marking the longest such streak since at least 1998, based on LSEG data.

Brent crude futures have retreated from six-month highs to around $111 a barrel in Asian trade, following talks between Iranian and Qatari officials in a bid to end the conflict. These negotiations are occurring amid fears that the war could reignite following the November 3 US midterm elections. President Donald Trump has stated that the United States will not initiate fresh attacks on Iran before the vote, describing discussions with Tehran as productive, while keeping open the possibility of military action afterward.

Opinion polls suggest that Democrats may regain control of the House of Representatives and possibly the Senate, as voter discontent over inflation, fueled by Trump's tariffs and the war, continues to grow. "Lower oil prices could extend short-covering in bonds, but a durable rally is unlikely until the midterm elections provide greater clarity on the war and its implications for oil," noted a private-bank trader.

Liquidity concerns in the banking system may also hinder demand for debt. Liquidity in India was reported to be near neutral at 304 billion rupees on Thursday. DBS Bank highlighted in a note that India's rates are currently under pressure from a sharp tightening in domestic liquidity conditions, which has been further exacerbated by the Reserve Bank of India's efforts to manage INR volatility.