State debt surprise to further pull down Indian bond yields

By Dharamraj Dhutia

Indian government bond yields are likely to continue their downward momentum at the start of the week, driven by lower-than-expected borrowing by states through bond sales in the current quarter.

The yield on the 10-year benchmark note (IN063335G=CC) is expected to move between 6.46% and 6.51% on Monday, after ending at 6.5114% on Friday, a trader at a private bank said.

"This is a very good start to a new quarter and after the positive push from the central bank's dovish policy guidance, we have a state debt calendar surprise and all this bodes well for a sustained bond rally," the trader said.

Indian states will borrow 2.82 trillion rupees ($31.78 billion) through the sale of bonds in the October-December quarter, which is lower than most market estimates.

Traders were expecting the borrowing to be around 3.25 trillion rupees, with some even fearing higher numbers after the centre slashed consumption taxes from September.

States that were slated to borrow a record 12 trillion rupees this year have raised just over 5 trillion rupees in the fiscal first half.

State debt supply will get further help after at least four major state-owned banks increased their internal limits for investing in these securities, following discussions with the Reserve Bank of India last month, according to five treasury officials.

Last week, the RBI kept its policy rate unchanged at 5.50% as expected, but said that low inflation had opened up policy space for supporting growth. Most market participants now expect a rate cut in December, when the committee meets next.

The RBI has cut rates by 100 basis points in 2025 so far.

RATES

India's overnight index swaps (OIS) are expected to dip slightly, amid positive sentiment.

The one-year OIS rate (INR1YMIBROIS=CC) closed at 5.43%, and the two-year OIS rate (INR2YMIBROIS=CC) ended at 5.39%. The five-year OIS rate (INR5YMIBROIS=CC) settled at 5.6650%.

KEY INDICATORS:

** Benchmark Brent crude futures BRN1! rose 1.7% to $65.45 per barrel, after rising 0.7% in the previous session.

** Ten-year U.S. Treasury yield US10Y was at 4.1443%; two-year yield (US2YT=RR) at 3.5800%

($1 = 88.7300 Indian rupees)