India bonds set to rally along Treasuries as Democratic win drives oil to two-month low

Mumbai - Indian government bonds are poised to rise on Thursday, mirroring a significant surge in US Treasury yields following Democrats' victory in both chambers of Congress. The triumph is fuelled by optimism over a potential end to the Iran war, which has driven oil prices to a two-month low.

The Democratic landslide can be attributed to voter dissatisfaction with President Donald Trump's policies, particularly the war's effect on everyday expenses. The party pledges to curb Trump's agenda, leading to hopes of decreased government spending and a faster resolution to the conflict.

US 10-year Treasury yields dropped 4 basis points to 4.85% in early Asian trade, following a 6-basis point decline the previous day. The US dollar slipped 0.2%, potentially benefiting the Indian rupee. Meanwhile, Brent crude oil prices plummeted 8% on Wednesday, marking the lowest level in over two months, falling to $93.70 a barrel. India, being the world's third-largest oil importer, stands to gain from cheaper crude, alleviating imported inflation pressures and easing strain on government finances.

The benchmark 6.94% 2036 bond yield may test the 7.15% mark in early trade, according to a private-bank trader. It fell over 11 basis points to 7.1880% on Wednesday, a 22-basis point decline over three days. Radhika Rao, senior economist at DBS, noted that the relief rally's durability will depend on the US policy outlook, especially decisions regarding the West Asia crisis, fiscal and debt matters, and AI-related investment policies.

Traders will also closely monitor domestic inflation and its impact on the Reserve Bank of India's policy stance, after the oil-price decline softened expectations of stringent tightening measures. The October retail inflation data is slated for release next week.