Fresh debt supply to provide directional cue for India bonds

Indian government bonds are poised for a steady start on Friday, with traders looking ahead to fresh debt supply at the weekly auction. Elevated oil prices, however, continue to weigh on longer-dated notes. A trader at a private bank sees the benchmark 6.94% 2036 bond yielding between 6.94% and 6.99%, after it finished the previous session at 6.9646%.

The government is expected to sell 320 billion rupees ($3.39 billion) of bonds at the auction, with 210 billion rupees of that from a fresh 5-year security. Demand for shorter-maturity debt has strengthened after far larger than expected inflows under the central bank's special programmes. Surplus liquidity in the banking system hit a record 9.7 trillion rupees on September 3, following $127.23 billion raised via a non-resident foreign-currency deposit scheme.

Brent crude held above $95 per barrel as tensions escalated and hostilities between the US and Iran resumed, adding to worries over Middle East supply. Such energy costs weigh on large importers such as India, because a lasting increase could add to inflation and strain public finances. The 10-year US yield stayed above 4.75%, while bets on a 25-basis-point Federal Reserve hike later this month stood above 50%, based on data from CME FedWatch.