Indian government bonds were likely to edge higher in early deals following a sharp decline in the previous session. The recovery expectation comes as global oil prices remained steady despite harsher US secondary sanctions on Iran.
According to market participants, the yield on the benchmark 6.94 per cent 2036 bond is expected to trade between 6.84 per cent and 6.87 per cent. The benchmark bond had closed at 6.8708 per cent previously.
A trader at a private bank noted that some market recovery is likely since oil prices have not spiked following the sanctions. However, the broader benchmark yield is expected to cling to the 6.85 per cent handle.
The market developments follow an announcement by US Treasury Secretary Scott Bessent regarding an expansion of sanctions aimed at cutting off Iran's economic lifeline to force an end to a nearly six-month war. The measures require countries to sever business ties with Tehran or risk exclusion from the dollar-based financial system, though specific targeted countries were not identified.
Analysts indicate that because the US focus remains economic, an immediate threat to Middle East oil supplies is unlikely. Benchmark Brent crude was held around $92 a barrel. Elevated crude prices remain a concern for major energy importers like India, as higher oil costs can fuel domestic inflation and strain the current account and government finances.
Meanwhile, recent minutes from the Reserve Bank of India's August monetary policy meeting indicated policymakers remain open to raising interest rates if inflation risks materialize and broaden. Governor Sanjay Malhotra stated that evidence of such spillovers could warrant policy tightening, while Deputy Governor Poonam Gupta noted a case for a rate hike could emerge within the year.
In addition to monitoring global oil and domestic monetary policy, traders are also bracing for fresh supply of the benchmark bond scheduled for release on Friday. The Indian debt market is set to remain closed on Wednesday for a local holiday.
India's overnight indexed swap rates are expected to consolidate near current levels following a sharp spike observed last week. The one-year rate ended at 5.92 per cent, the two-year rate closed at 6.1350 per cent, and the five-year rate settled at 6.45 per cent.
"The stability in global crude oil prices despite geopolitical tensions provides a temporary cushion for the Indian debt market. However, with the Reserve Bank of India signaling potential policy tightening if inflation risks materialize, bond traders must closely monitor both energy trends and domestic macroeconomic indicators moving forward." — Dr. Shishir Gupta, Founder & CEO, StartupLanes
