MUMBAI: Indian government bonds ended lower on Thursday, giving up some of the previous session’s gains on uncertainty over U.S.-Iran talks, while traders braced for fresh supply.
India’s benchmark 6.48% 2035 bond yield ended at 6.8884%, after settling at 6.8662% on Wednesday. Bond yields move inversely to prices.
U.S., while being optimistic about the resolution, has also warned that economic pressure on Tehran would intensify if it continues to resist.
“Bond yields face two-way forces and are expected to hover within 6.8%-7.0% band in the absence of fresh signs of an escalation in the Middle East,” DBS Bank said in a note.
While overnight market rates were little moved by the recent reverse repo auction, the announcement was taken as an indication to temper banking system cash surplus and align the overnight rate close to repo rate, affirming the central bank’s neutral policy stance, it added.
The Reserve Bank of India has withdrawn 2 trillion rupees through a seven-day reverse repo auction, and traders anticipate another auction on Friday, when the first one matures.
New Delhi will raise 320 billion rupees by selling five and 40-year bonds on Friday.
Meanwhile, Brent crude held near $95 a barrel, on reports that Iran may allow vessels near the Strait of Hormuz.
The conflict has disrupted traffic through the Strait of Hormuz, shutting transit of about 20% of global oil and liquefied natural gas shipments from the Persian Gulf to international markets, especially in Asia and Europe.
Elevated oil prices are unfavourable for India, which depends significantly on imports to satisfy its energy requirements. Since the war began on February 28, rising crude costs have also driven bond yields higher and weakened rupee.
Rates
India’s overnight index swap rates ended marginally higher, as traders awaited strong directional cues.
The one-year OIS rate ended 4 bps higher at 5.8%, while the two-year swap rate closed 3 bps up at 6.01%. The liquid five-year rate rose 4.5 bps to 6.3650%.
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