The yield on India’s 10-year government security hovered around 6.78%, trading in a narrow band as elevated crude oil prices dampened demand for sovereign bonds ahead of key inflation releases in both India and the US. Brent crude rose 0.8% to $89.6 per barrel, with uncertainty surrounding the Middle East conflict keeping oil prices high and stoking inflation concerns.
India’s July inflation data, due later on Wednesday, is expected to show a rise to 4.50% from 4.38% in June. A stronger-than-expected US inflation print could also reignite expectations of further Federal Reserve rate hikes, compressing the yield differential with US Treasuries and exerting upward pressure on Indian yields.
However, market expectations for additional rate hikes by the Reserve Bank of India have softened after the central bank left policy rates unchanged last week and revised its inflation projections lower. Robust foreign inflows and abundant domestic liquidity have further underpinned the bond market. The RBI’s special diaspora deposit scheme had attracted more than $36.7 billion as of July 17, while the daily average cash surplus has remained above INR 3 trillion in August.
