Indian bonds drift with oil; inflation data in focus

Indian government bonds held in a narrow range early on Monday, as calmer oil prices supported sentiment, while looming US and Indian inflation data kept traders cautious.

Brent crude hovered around $98 a barrel, little changed from Friday, after US President Donald Trump said on Sunday he was highly unlikely to order fresh attacks on Iran while talks to end the conflict progressed.

States will also conduct an auction of bonds worth 290.5 billion rupees ($3.10 billion) later in the day, adding to the supply, as the debt market will be shut on Tuesday for a local holiday.

Indian government bonds exhibited limited movement today as oil prices showed signs of stabilization. Investors are remaining cautious, especially with inflation data from both the United States and India on the horizon. Scheduled for later today is a bond auction totaling 290.5 billion rupees. Analysts predict yields on the 10-year bond could oscillate between 7.30% and 7.10%, with particular attention on India's October inflation report due for release this Thursday.

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The benchmark 6.94% 2036 bond yielded 7.1752% at 10:55 a.m. IST, little changed from Friday.

The yield fell 22 basis points last week, its steepest weekly decline in nearly seven years, after a Democratic sweep in the US midterm elections rekindled hopes of a resolution to the Iran war.

Crude tumbled more than 16% after the midterms, and the 10-year US yield shed about 7 bps, easing risks to India's inflation, currency and fiscal outlook, and prompting an aggressive repricing of the Reserve Bank of India's rate path.

Fresh gains would now require a durable US-Iran agreement and another leg lower in oil, traders said.

"10-year yield may move in a 7.30%-7.10% range for some time," said Umesh Tulsyan, managing director at Sovereign Global Markets, New Delhi, adding that it could head toward 7% post December policy.

Indian bonds outperformed Asian peers last week, with foreign investors buying more than 83 billion rupees of index-eligible bonds.

Focus now shifts to India's October inflation data, due on Thursday, with consumer inflation expected to rise to 5.93% from 5.54% in September, according to a Reuters poll.

Overnight index swaps fell further in early deals as oil prices steadied.

The 1-year OIS rate fell 3.25 bps to 6.3%and the 2-year rate dropped 2.5 bps to 6.32%. The 5-year rate fell 4 bps 6.44%.

($1 = 93.8375 Indian rupees)