Indian government bonds were broadly unchanged in early deals on Tuesday, as market participants braced for more liquidity removal ahead of next month's monetary policy decision, when an interest rate hike is largely priced in.
The benchmark 6.94% 2036 bond yield was at 7.0516%, as of 10:30 a.m. IST, after closing at 7.0497% in the previous session.
"We are not expecting any major trend or pick-up in volume, and the market should move sideways today," a trader with a state-run bank said.
Oil prices eased on Monday, though the benchmark Brent crude futures edged higher in Asian trade, as investors monitored developments in the US-Iran conflict ahead of this week's United Nations meeting for signs of a possible diplomatic breakthrough.
Iran and the US traded fresh threats on Sunday, keeping geopolitical risk premiums embedded in crude prices, even as President Donald Trump said he was open to meeting his Iranian counterpart.
For India, which meets most of its energy needs through imports, sustained strength in crude prices is a key macroeconomic risk.
Higher oil costs raise the country's import bill, pressure the current account deficit and can complicate the inflation outlook, straining government finances.
Expectations of a rate hike by the Reserve Bank of India at its next monetary policy meeting on October 7 have strengthened after retail inflation accelerated to 4.82% in August.
The US Federal Reserve's 25-basis-point rate increase last week, its first since 2023, has also reinforced concerns that global monetary conditions could remain tight for longer.
Liquidity conditions have already tightened after the RBI sold 750 billion rupees ($7.83 billion) of bonds through open market operations, and will sell another 250 billion rupees of securities on Monday.
RATES
Overnight indexed swap rates were largely unchanged amid shallow trading volumes.
The one-year rate ended at 6.07%, and the two-year rate closed at 6.2850% on Monday and was not yet traded. The five-year rate was at 6.55%.
