India bonds continue rally ahead of inflation data

The benchmark 6.94% 2036 bond yield settled at 7.1529%, nearly 4 basis points below Friday's close. India's debt market will be closed on Tuesday for a local holiday.

The benchmark yield plunged 22 basis points last week, its sharpest weekly drop in nearly seven years, after a Democratic sweep in the US midterm elections revived hopes for a resolution to the Iran war.

Indian government bond yields extended their rally on Monday, with the benchmark 10-year yield falling nearly 4 basis points as easing crude oil prices and hopes of a US-Iran peace deal improved sentiment. Investors are now watching US and Indian inflation data for cues on the outlook for interest rates.

Brent crude, which tumbled more than 16% last week, fell 3.6% to $94.6 a barrel on Monday.

US President Donald Trump said fresh attacks on Iran were highly unlikely while talks progressed. Trump will meet the prime minister of key mediator Qatar on Monday as efforts to end the war ramp up.

Lower oil prices have eased concerns around India's inflation, currency and fiscal position, triggering a sharp scaling back of RBI hike expectations.

India's October consumer inflation reading, due Thursday, is forecast to rise to 5.93% from 5.54% in September, according to a Reuters poll, nearing the upper end of the RBI's 2%-6% tolerance band.

Market participants will also closely watch Tuesday's US inflation reading after stronger-than-expected jobs data bolstered bets of a Federal Reserve rate hike in December. Markets are pricing an 80% probability of a December increase, according to the CME FedWatch Tool.

"If the Fed hikes rates in December, the RBI may follow," said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank.

Rates

The 1-year OIS rate fell 5.25 bps to 6.28%and the 2-year rate dropped 4.5 bps to 6.3%. The 5-year rate slid 8.5 bps to 6.3950%.