Synopsis

Indian government bonds traded within a narrow range this past week. Fading inflation and rate-hike concerns left traders seeking market direction. Buyers entered long bonds as the yield curve steepened, attracting value. Rising oil prices exerted some pressure, but liquidity and softer inflation eased worries. Expectations now suggest neither the RBI nor the Federal Reserve will raise rates soon.

Indian government bonds were rangebound in the week ended Friday, as fading inflation and rate-hike worries left traders hunting for direction, while a steeper curve lured buyers into long bonds.

The yield on the benchmark 6.94% 2036 bond ended at 6.7578%, versus 6.7582% in the previous session.

The borrowing rate failed to ‌breach the 6.75% ⁠mark, ⁠a key psychological level, as sales by state-run banks offset demand from foreign banks, traders said.

"We have seen buying across the curve, with the short and long ends bought aggressively, while the belly remains sluggish," said Alok Singh, head of treasury at CSB Bank in Mumbai.

The belly of the yield curve, which refers to the most liquid 10-year ​segment, remained anchored by ample supply, traders said.

Long bonds ⁠attracted value ‌buying this week as relatively higher yields attracted buyers, traders ​said, narrowing ​the gap between yields on the 10-year and 40-year bonds ⁠to a six-week low of 69 basis points.

Rising oil prices ​kept pressure on bonds, with Brent crude gaining more than ​4% this week to $87 per barrel. Higher crude prices can stoke inflation and hurt government finances in India, which imports most of its crude oil needs.

Liquidity from a deposit scheme for attracting dollars from non-resident Indians, coupled with softer inflation prints in India and the United States, has blunted the oil-driven ‌pressure and cooled rate-hike expectations.

U.S. consumer prices rose 0.1% in July after falling in June, while annual inflation eased to 3.4% ​from 3.5%. India's retail ​inflation rose to ⁠4.45% in July from 4.38% in June, coming in slightly below market expectations.

The data has strengthened expectations that neither the RBI nor the Federal Reserve would raise ​rates soon, traders said.

RATES

India's overnight index swap rates fell for a third straight week as RBI rate-hike bets receded.

The one-year swap rate fell 3.5 bps over the week to 5.73%, the two-year rate declined 2 bps to 5.9225%, and the five-year rate eased 1.5 bps to 6.2475%.

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