Indian bonds post first weekly gain in five on RBI stance, softer crude

Indian government bonds closed little changed on Friday, yet managed to secure their first weekly gain in five weeks. The uptick was driven by a combination of easing crude oil prices and a dovish stance from the central bank, which improved market sentiment.

The Reserve Bank of India held its benchmark repo rate steady on Wednesday but trimmed its inflation projections for both headline and core metrics. It also assured adequate liquidity in the banking system, easing concerns about an imminent rate hike.

According to a note from ICICI Securities Primary Dealership, the RBI appears to be monitoring core inflation trends rather than relying on forecasts, given past instances of undershooting. The note suggested that policy changes would only be considered if core inflation approaches the 4% target, hinting that the central bank may not be inclined to raise rates this fiscal year.

The yield on the benchmark 6.94% 2036 bond settled at 6.7651%, slightly lower than the previous close of 6.7666%. Over the week, the yield declined by 7 basis points.

Oil prices fell for a second consecutive week, buoyed by hopes of a diplomatic resolution to the U.S.-Iran conflict, which could restore supply from the Middle East. Brent crude hovered around $82 per barrel, down 9% for the week after a 7% drop the prior week. As the world's third-largest importer and consumer of oil, India is sensitive to crude price movements, which influence its import bill, inflation, and currency.

In the derivatives market, India's overnight index swap rates rose on Friday but recorded their steepest weekly decline in over two months. The one-year swap ended at 5.77%, the two-year at 5.94%, and the five-year swap settled at 6.26%.