Indian bonds drift as US debt rout saps oil relief before CPI

The benchmark 6.94% 2036 bond yield was little changed at 7.2183% at 10:30 a.m. IST, after posting its sharpest one-day fall in a month on Wednesday.

Markets await crucial consumer inflation data, which could reset expectations for the Reserve Bank of India's rate path. A Reuters poll forecasts October annual inflation at 5.93%, up from 5.54% in September.

On Thursday morning, Indian government bonds remained stable, reflecting a pause after recent volatility. Market sentiment is influenced by declining oil prices and climbing US Treasury yields, with inflation data on the horizon. The Reserve Bank of India is expected to modify its policy rate in light of these figures. Meanwhile, the ongoing Iran conflict could affect oil pricing, as traders prepare for a significant bond auction set for Friday.

The RBI raised rates in October for the first time in nearly four years and shifted to a "calibrated tightening" stance, and is widely expected to raise its policy rate by 25 basis points in December.

An upside surprise in inflation could spur bets on a 50-basis-point rate hike next month, traders said.

Traders are closely watching headlines on the Iran war and their impact on oil prices after a Democratic sweep in US midterms raised hopes of a resolution.

Oil prices have retreated from $117 per barrel before US midterms to $91 per barrel, supporting sentiment for oil-import-dependent India.

"Trump losing the midterms is positive for markets, but we need to see how the US-Iran war develops," said a trader at a private bank. "With oil prices easing, the RBI may not need to hike as aggressively as was feared a few weeks ago."

Still, the backdrop remains fragile.

The benchmark 10-year US Treasury yield neared 5% after October US inflation exceeded forecasts, prompting investors to raise bets on a larger Federal Reserve rate increase in December.

New Delhi's 340-billion-rupee auction of the 10-year note on Friday will also be a key test of demand, traders said.

RATES

The 1-year and the 2-year rate were not yet traded. The 5-year OIS rate was down slightly at 6.48%