Indian government bonds gained in early trade on Monday as a drop in crude oil prices brought buyers back. Traders are also watching the upcoming US midterm elections for signs of where the war, oil prices and global interest rates may head next.
Brent crude futures fell 3.2% to $109.75 a barrel in Asian trade. That took the contract off last week’s six-month high. Iranian officials and Qatari mediators held talks for a third day in a row, aimed at ending the US-Israeli war on Iran.
Why cheaper oil matters for India
India is the world’s third-largest oil importer and consumer. Lower crude prices ease worries about inflation and reduce pressure on the current account and the government’s finances. They can also dampen expectations that the Reserve Bank of India will tighten policy aggressively.
By 11:30 a.m. IST, the yield on the benchmark 6.94% 2036 bond had dropped about 5.5 basis points to 7.3612%. Bond yields move in the opposite direction to prices, so a lower yield means bond prices went up.
The rupee also firmed 0.08% to 94.87 against the US dollar.
“With crude and the rupee behaving well, market is finding some strength,” said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank.
Focus turns to US elections
Market participants will now look at whether the US midterm result changes the chances of a ceasefire and a lasting correction in oil prices.
A trader at a private bank said a 50-basis-point rate hike in December remains a risk if inflation stays high. However, a peace deal and a meaningful fall in crude could undo some of those expectations, the trader added.
The RBI raised its policy rate and changed its policy stance in October, signalling that more tightening could follow. It expects inflation to peak near 6% in the third quarter.
Swap rates ease
Rates on overnight indexed swaps (OIS) also came down, as cheaper oil lessened concerns about rate hikes.
The one-year OIS rate fell 4.5 basis points to 6.6750%. The two-year rate slipped 6.25 basis points to 6.6850%, and the five-year rate eased 6.5 basis points to 6.7975%.
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