Indian Bonds Poised to Extend Gains on Softer Oil, US Yields

Indian government bonds are expected to open stronger on Tuesday, supported by softer crude oil prices and a decline in US Treasury yields, even as expectations of tighter liquidity and an eventual interest-rate increase are seen limiting the upside.

The benchmark 6.94% 2036 bond yield is likely to move in a range of 7.01% to 7.06% during the session, according to a primary dealership trader. The paper had settled at 7.0497% at the close of the previous session.

Buying interest is anticipated at the open, but the trader cautioned that steady selling pressure could keep the benchmark 10-year yield from slipping below the 7% mark.

Oil prices eased on Monday and held broadly steady in Asian hours as investors watched for diplomatic movement on the US-Iran conflict at this week's United Nations meeting, while also tracking a partial resumption of shipments from Saudi Arabia. The two sides exchanged fresh threats on Sunday, though US President Donald Trump indicated he would be open to meeting his Iranian counterpart.

Crude prices carry outsized significance for India, which relies heavily on energy imports. Persistently elevated oil prices can feed inflation and pressure both the current account and the government's fiscal position.

Expectations of an Indian rate increase have strengthened after August retail inflation came in at 4.82% and the US Federal Reserve raised rates by 25 basis points last week — its first such move since 2023. The Reserve Bank of India's monetary policy decision is scheduled for October 7, with a majority of market participants now anticipating a hike.

The central bank has sold bonds worth 750 billion rupees through open market operations and is due to auction 250 billion rupees of securities on Monday.

In the swap market, overnight indexed swap rates are expected to soften in tandem with oil and US yields. The one-year rate ended at 6.07%, the two-year at 6.2850% and the five-year at 6.5425%.