India bonds under pressure before debt supply; hot inflation prints pinch further

The benchmark 6.94% 2036 bond yield was 7.3113% as of 10:00 a.m. IST, up from 7.2467% on Thursday. The yield has risen by more than 16 basis points over the last three sessions.

New Delhi plans to sell 340 billion rupees ($3.62 billion) of the benchmark 2036 paper later in the day, taking its outstanding issuance to 2.72 trillion rupees, the highest for any security ever.

In an interaction with Kshitij Anand of ETMarkets, Devang Shah, Head – Fixed Income at Axis Mutual Fund, said investors should consider building their fixed-income allocation gradually and focus on high-quality instruments, as oil prices, global interest rates and liquidity conditions could continue to fuel volatility in the bond market.

"Investors are turning cautious ahead of the auction, especially with sticky inflation in both India and the United States raising doubts over larger-size interest rate hikes," a trader with a primary dealership said.

US yields climbed on Thursday after President Donald Trump said Washington did not need to strike a deal with Iran, adding to concerns that geopolitical tensions could keep oil prices elevated and complicate the inflation outlook.

The move followed stronger-than-expected October consumer price data, which prompted markets to increase bets that the Federal Reserve could opt for a larger-than-usual hike on December 9.

The 10-year Treasury yield rose decisively above 5% on Thursday and stayed elevated during Asian hours, with traders pricing in a 15% chance of a 50-basis-point move, up from zero a week earlier.

In India, the inflation backdrop has also turned less favourable. Annual retail inflation accelerated to 6.09% in October from 5.54% in September, surpassing the 5.93% forecast in a Reuters poll and the Reserve Bank of India's medium-term inflation target of 4%.

The data reinforced expectations that the Reserve Bank of India will follow up its October rate increase - its first in nearly four years - with another hike in early December.

RATES

The one-year rate was at 6.52%, while the two-year rate was not yet traded, and the five-year rate jumped 8 bps to 6.61%.

($1 = 94.0425 Indian rupees)