India bonds jump as oil crashes, dovish RBI may further boost rally

Synopsis

Indian government bonds saw a notable rise on Wednesday morning, propelled by falling oil prices that created a favorable outlook for inflation prior to the upcoming RBI policy announcement. The Reserve Bank of India is anticipated to hold steady on key interest rates. Inflation projections will significantly inform the central bank's advice, while overnight index swap rates dipped sharply in the initial trading session.

Indian government bonds jumped early on Wednesday as a sharp drop in oil prices improved the inflation outlook ahead of the Reserve Bank of India's policy decision, with investors awaiting its guidance and updated economic projections.

The benchmark Indian 6.94% 2036 bond yield was at 6.7807% as of 9:40 a.m. ‌IST, after ⁠closing ⁠at 6.8152% on Tuesday. The policy decision is due at 10:00 a.m. IST.

The RBI is ​widely expected to keep its key interest rate unchanged, according to a Reuters poll, ​with most economists not anticipating a hike in 2026- a decision that would diverge from many of its global peers in recent days.

Inflation projections hold ​the key, after retail inflation accelerated to 4.38% ⁠in June, ‌above the RBI's 4% target. The RBI had projected ​average retail ​inflation at 4.2% for April-June, but the actual reading has ⁠undershot by almost 30 bps.

"Inflation projection could be the ​deciding factor on whether the policy is tilting towards ​the dovish or hawkish side," trader with a state-run bank said.

"Either they will have to reduce the annual projection or raise their quarterly forecasts." OIL FALL

Benchmark Brent crude tumbled 5.2% on Tuesday, adding to its more-than-7% fall on Monday, and was trading 1.2% down in Asian hours at $78.40 per ‌barrel.

Oil prices crashed after comments by Qatari and U.S. officials raised hopes for a diplomatic resolution to the Iran war, which ​could improve ​oil flows through ⁠the Strait of Hormuz.

India is a large importer of crude and a plunge in prices improves the outlook for inflation as well as the current account ​deficit.

India's overnight index swap rates nosedive in early trading, as a drop in oil prices bodes well for inflation and interest rates.

The one-year swap rate was down 6 bps at 5.81%, while the five-year OIS rate pummelled 8 bps to 6.28%. The two-year rate was not yet traded.

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