India bonds end flat as oil woes come up against short covering

What happened

Indian government bonds swung between gains and losses on Wednesday as concerns about oil-driven inflation pushed prices lower before short covering, which is buying back borrowed bonds, lifted them. The benchmark 6.94% 2036 bond yield ended little changed at 7.44% after trading between 7.42% and 7.49%.

Confirmed

Global impact / market context

Higher crude prices raise costs for India, the world's third-largest oil importer, which can lift inflation, widen the fiscal deficit and slow growth. That pressures the rupee and can keep bond yields elevated, affecting what the government pays to borrow and what companies pay for loans.

Analyst inference

The benchmark yield failed to reach 7.50%, a level traders called key technical resistance, for a second session, prompting short covering. Traders remained cautious before the Federal Reserve's policy decision, with crude near $115 a barrel after an attack on Saudi Arabia's largest refinery.

Analyst inference

What to watch

1. Crude prices near $115 a barrel after the attack on Saudi Arabia's largest refinery, and whether supply fears ease, since for India higher oil raises inflation risk, the fiscal deficit and slower growth. Confirmed
2. The Federal Reserve's policy guidance after its decision, which investors will read for signals on the timing and extent of future easing, with MUFG noting a December hike is close to fully priced. Proposed
3. The 7.50% level on the 10-year yield as technical resistance, and the rupee near 95.22 per dollar, since further weakness could keep bond appetite contained and pressure yields higher. Analyst inference

Evidence

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