Indian Government Bonds Steady as Oil Prices Stabilise Ahead of Debt Sale

Indian government bonds steadied early on Friday as oil prices stabilised, offering some relief after hawkish central bank minutes and a crude price spike put the market on track for its worst week since early April. Sentiment across the market has weakened since the Reserve Bank of India (RBI) released minutes from its August meeting on Wednesday, which struck a more hawkish tone than its initial policy statement.

A ₹28,000 crore ($2.93 billion) debt sale scheduled for later in the day will test current market demand, with a 15-year bond making up more than half of the total supply. The benchmark 6.94 per cent 2036 bond yielded 6.8723 per cent at 10:45 am IST, remaining perched near Thursday's close and marking a two-month high. The yield has risen about 12 basis points over the week, setting it on track for its biggest weekly increase since April 3.

"There is a weakening bias in the market because of the hawkish RBI policy minutes, though the auction should see sufficient demand," said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank.

Meanwhile, Brent crude futures eased into a holding pattern at $93.5 a barrel in Asian trade. Expectations of an RBI rate hike this year have resurfaced as inflation pressures build. Domestic support has also ebbed following the central bank's decision to bring forward by a month the closure of a dollar-attracting scheme that previously served as a key source of bond demand.

Retail inflation in July accelerated to 4.45 per cent, moving above the RBI's 4 per cent medium-term target. Traders noted that higher oil prices and global yields will continue to shape the market's next move. The US 10-year Treasury yield hovered near 4.70 per cent, adding further external pressure.

India's overnight indexed swap rates awaited fresh cues following a sharp rise in the previous session. The one-year swap rate remained flat at 5.9250 per cent, while the two-year rate rose by 1 basis point to 6.17 per cent. The liquid five-year rate showed little change, resting at 6.4725 per cent.

"The stabilisation of oil prices provides a brief window of relief, but the market is clearly navigating tighter liquidity and shifting monetary signals. With retail inflation above the RBI's medium-term target and impending debt supply, institutional investors and treasury desks will need to closely monitor global yield movements and domestic rate expectations to manage capital efficiently." — Dr. Shishir Gupta, Founder & CEO, StartupLanes