Indian government bonds rallied again on Monday, extending the sharp gains of last week. Hopes of a peace deal between the US and Iran pushed oil prices lower and lifted sentiment ahead of inflation data from both India and the United States due later this week.
The benchmark 6.94% 2036 bond yield settled at 7.1529%, about 4 basis points below Friday’s close. Bond yields fall when prices rise, so the drop points to stronger demand. India’s debt market will be closed on Tuesday for a local holiday.
The benchmark yield fell 22 basis points last week, its sharpest weekly decline in nearly seven years. The move followed a Democratic sweep in the US midterm elections, which revived hopes of ending the conflict with Iran.
Oil prices fall
Brent crude had already dropped more than 16% last week. On Monday it fell 3.6% to $94.6 a barrel. US President Donald Trump said fresh attacks on Iran were highly unlikely while talks continue. He is set to meet the prime minister of Qatar, a key mediator, on Monday as efforts to end the war gather pace.
Lower crude has eased worries about India’s inflation, currency and fiscal position. As a result, expectations that the Reserve Bank of India will raise interest rates have been sharply scaled back.
Inflation data in focus
India’s consumer inflation reading for October is due on Thursday. A Reuters poll forecasts it will rise to 5.93% from 5.54% in September. That would bring it close to the upper end of the RBI’s 2% to 6% tolerance band.
Traders will also watch Tuesday’s US inflation figures. Stronger-than-expected jobs data has boosted bets on a Federal Reserve rate hike in December. The CME FedWatch Tool shows an 80% probability of such an increase.
Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank, said that if the Fed hikes rates in December, the RBI may follow.
Swap rates ease
Overnight indexed swap rates also fell with oil prices. The one-year OIS rate dropped 5.25 basis points to 6.28%, while the two-year rate fell 4.5 basis points to 6.3%. The five-year rate slid 8.5 basis points to 6.3950%.