Indian bonds steady ahead of Fed decision

Indian government bonds traded in a tight range on Tuesday, with investors cautious ahead of the US Federal Reserve’s monetary policy decision due on Wednesday. The 6.94% 2036 bond yield was seen confined between 7.46% and 7.49% after having closed at 7.4826% in the previous session, and in early trading it eased to about 7.4732%, reflecting modest buying interest. Market participants anticipated another session of rangebound trading and shallow volumes, citing limited changes in immediate market drivers.

Traders focused on whether the Fed, which was widely expected to keep its benchmark rate unchanged, would signal the possibility of further tightening later in the year. The outcome and accompanying guidance were viewed as key for global risk sentiment and for the trajectory of US yields, which in turn influence Indian borrowing costs.

Oil prices remained a central factor for the Indian debt market, with Brent crude (UKOIL) trading below $115 per barrel in Asian hours after rising 6.2% last week, its biggest weekly gain since early September. In early Tuesday trade Brent (UKOIL) slipped about 1% to $114.5 a barrel, consolidating after the recent surge. The Indian bond market has closely tracked these moves since Brent hit a six-month high last week, as costlier energy imports feed into inflation and fiscal concerns.

India imports nearly 90% of its oil needs, making sustained high crude prices a risk to the inflation outlook, the rupee and government finances. Elevated oil and rising global yields have already weighed on sentiment, contributing to a 10-week climb in the benchmark government bond yield, the longest such streak since 1998.

On the supply side, Indian states were set to raise 233 billion rupees (about $2.45 billion) by selling bonds later on Tuesday. Traders viewed this state-loan auction as a test of already shallow appetite for debt, particularly at longer maturities. While the quantum of state issuance was not considered large enough on its own to cause major disruption, demand for duration has withered as investors reassess inflation and fiscal risks.

Both federal and state governments have lined up borrowing programmes that lean toward longer-dated securities, putting additional upward pressure on yields. Weakness at the long end has helped drive yields in that segment to multi-year highs, even as some shorter tenors see steadier demand.

Domestic policy expectations added another layer to market dynamics. The Reserve Bank of India raised its key interest rate and changed its stance earlier this month, hinting at more increases ahead. Overnight indexed swaps implied expectations of over 100 basis points of RBI hikes over the next 12 months, reinforcing caution toward duration.

Swap rates eased slightly alongside the modest firming in bond prices. The 1-year OIS was around 6.65%, while the 2-year rate was near 6.6850% and the 5-year rate about 6.82%, after minor declines of roughly 1 to 1.5 basis points from earlier levels.

Foreign investor behaviour has reflected the challenging backdrop of elevated oil prices and rising global yields. Since August, overseas investors have sold a net 153 billion rupees (about $1.6 billion) of Indian government debt under the fully accessible route, which allows unrestricted foreign participation. These outflows have added to upward pressure on yields and contributed to cautious trading conditions.

The Indian rupee traded stably in this environment, even as market participants weighed the risk that persistent crude strength and any renewed currency weakness could prompt further RBI action. With key global data and the Fed decision approaching, traders preferred to limit aggressive positioning, leaving Indian bonds hovering close to recent levels despite a backdrop of sustained yield increases in prior weeks.