Indian government bonds erased early losses on Thursday as a pullback in oil prices triggered short-covering and eased anxiety over prospects of a Reserve Bank of India rate hike after the Federal Reserve's first rate increase in more than three years.
The benchmark 6.94% 2036 bond yield settled at 7.0463%, marginally below Wednesday's close. Bond yields move inversely to prices.
Oil prices extended losses on Thursday after reports of additional Saudi crude cargoes through Oman eased supply concerns, though Brent remained above $100 a barrel amid fears the Middle East conflict could widen.
The U.S. 10-year Treasury yield also reversed early gains, falling 3 basis points to 4.97% by 5:00 p.m. IST.
The Fed's widely expected 25-basis-point rate increase even after repeated calls from President Donald Trump for cuts boosted its inflation-fighting credibility with investors. Still, uncertainty over the eventual peak in U.S. rates is likely to keep global stocks and bonds volatile, traders said.
Indian rate-hike expectations hardened further after the Fed's move. Rate hike bets had risen after India's retail inflation accelerated in August, with risks skewed higher from El Nino and crude oil prices, while hawkish RBI minutes added to tightening concerns.
"The Fed's 25-bps hike appears to mark the start of a prolonged tightening cycle," said Apoorva Javadekar, chief economist, Shriram Group and CEO, Shriram Research.
"Indian yields remain vulnerable to higher US yields."
Sentiment also remained fragile as the RBI drained liquidity through aggressive cash-withdrawal operations, including open-market bond sales that added to supply pressure.
The central bank absorbed liquidity equivalent to nearly 0.2% of total bank deposits through bond sales, it said on Thursday.
RATES
Overnight indexed swap (OIS) rates reversed course late in the session on easing oil prices.
The one-year rate was down 4 bps at 6.04%, while the two-year rate fell 5.5 bps to 6.25%, and the five-year rate dropped 4.75 bps to 6.58%.
