Indian government bonds slipped on Tuesday as Brent crude briefly hit the $90-per-barrel level after U.S.-Iran peace talks stalled, while traders awaited July inflation data for clues on the Reserve Bank of India's rate path.
Brent extended Monday's 5% climb after Washington responded to Tehran's peace proposal with fresh demands, but trimmed some gains to last trade at $87.7. Elevated oil prices could stoke inflation and strain the fiscal balance, current account and currency in India, the world's third-largest crude importer.
The benchmark 6.94% 2036 Indian bond yield rose 1.5 basis points to 6.7791%, its biggest one-day rise in over one week.
"Some value buying emerged in the second half of the session as the 10-year yield did not hold above key 6.80% level," a private bank trader said.
Investors now await inflation data for the U.S. and India, due Wednesday. Rising price pressures in the U.S. have lifted the implied probability of a September Federal Reserve rate hike to 51%, from 44% a day earlier.
India's retail inflation reading is forecast to edge up to 4.50% in July from 4.38% in June.
Still, ample banking-system liquidity from the RBI's diaspora deposit scheme supported demand, especially for the short-end.
"The short end of the yield curve should continue to be supported by surplus banking system liquidity and reduced issuance of certificate of deposits by banks as foreign inflows remain strong," said Puneet Pal, head of fixed income at PGIM India Mutual Fund.
Some investors also picked up longer-dated bonds as the curve steepened. Foreign investors bought nearly 17 billion rupees ($178 million) worth of the 7.34% 2064 bond so far this week, CCIL data showed.
RATES
India's overnight index swaps also jumped tracking higher oil prices.
The one-year rate closed at 5.79%, up 1.25 bps, and the two-year rate rose 4.75 bps to 5.9850%.
The five-year rate perched 3.75 bps higher at 6.2925%.
