India Bonds Seen Choppy As Market Eyes Debt Sale Amid Rate Hike Fears; RBI Dividend To Support

Indian government bonds are set for a choppy trading session on Friday as a fresh debt supply and concerns of rate hikes will be in focus, but rising bets of a record surplus transfer from the central bank will limit any major selloff.

The benchmark 6.48% 2035 bond yield is expected to move in the 7.07%-7.14% range, a private bank trader said. It had ended at 7.1134% on Thursday. Bond prices move inversely to yields.

India will aim to raise $3.33 billion through the sale of three-year, seven-year and 30-year bonds later in the day.

"We are in for another push-and-pull trading session for bonds, as traders are expected to take conflicting positions amid contrasting news flow," the trader said.

Bond yields surged on Thursday after Bloomberg News reported that the Reserve Bank of India is considering all available options to stabilize the rupee, including raising interest rates.

Economists at Standard Chartered said the RBI is likely to start hiking rates as early as June, citing increasing inflation risks from elevated crude prices triggered by the Middle East war. They expect 25 basis-point hikes each in June and August.

Meanwhile, oil prices and Treasury yields remained largely unchanged on Friday, with the benchmark Brent crude contract at $105 per barrel and the 10-year yield around 4.57%.

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Investors doubted the prospects of a breakthrough in US-Iran peace talks, with the two sides still at loggerheads on Tehran's uranium stockpile and control of the Strait of Hormuz.

The major focus for the day remains on the RBI's surplus transfer, likely to hit yet another record. A Reuters poll predicted a dividend of 2.9 trillion rupees to 3.2 trillion rupees, which could provide significant fiscal support to the government.

Rates

India's overnight index swap rates will remain volatile after surging on Thursday.

The one-year swap ended 15 bps higher at 6.36%, while the two-year rate closed at 6.5550%. The five-year rate settled at 6.85%.