Indian government bonds will likely stay in a narrow range on Tuesday as traders wait for the RBI policy decision. The benchmark 6.94 per cent 2036 bond yield may trade between 7.19 per cent and 7.24 per cent. Many investors expect a rate hike after seven weeks of rising yields.
Indian government bonds are likely to be little changed at the open on Tuesday, with traders pricing in the central bank's first rate hike in nearly four years ahead of its policy decision a day later.
The benchmark 6.94 per cent 2036 bond yield may trade in a 7.19 per cent-7.24 per cent band, traders with a primary dealership said, after ending at 7.2108 per cent on Monday.
The yield has risen in each of the last seven weeks, gaining a cumulative 45 basis points, its longest such streak in over a year.
Bond yields rise when prices fall.
"The Reserve Bank of India is expected to begin its rate-hiking cycle in October, while retaining the neutral stance. The hiking cycle is likely to be shallow, with a cumulative 75 bps of hikes by February 2027, aimed primarily at preventing the real policy rate from turning negative as inflation rises," IDFC First Bank said in a note.
Investors have loaded up bets that the central bank will raise rates, with almost 60 per cent of economists in a Reuters poll expecting a 25-basis-point increase.
Traders will also focus on the RBI's forward guidance as well as any other measures to remove liquidity surplus from the banking system.
In September, the RBI sold bonds worth ₹1 lakh crore ($10.39 billion), the largest in at least a decade, and has been aggressively conducting reverse repos on a daily basis as the central bank aims to drain excess cash.
RATES
India's overnight indexed swap (OIS) rates are likely to remain rangebound with a rate hike already priced into swaps.
The one-year OIS rate ended at 6.2625 per cent, while the two-year rate closed at 6.4475 per cent. The liquid five-year rate settled at 6.69 per cent.