Indian Government Bonds Face Pressure Amid State Debt Supply and Rupee Decline

Indian government bond prices remained stable on Tuesday, amidst a confluence of factors that are influencing market behaviour. Traders are preparing for a significant increase in state debt supply, coupled with a depreciating rupee that has reached a record low, both of which are dampening investor sentiment.

As of 10:10 a.m. Indian Standard Time, the benchmark 10-year government bond yield stood at 6.5605%, slightly down from its previous close of 6.5732% on Monday, marking the highest yield since September 30. Bond yields typically rise when prices fall, indicating cautious trading in the market.

The Indian rupee hit a historic low of 89.76 against the US dollar on Tuesday, primarily driven by speculative trading and heightened corporate demand for dollars. This depreciation of the rupee has contributed to a cautious atmosphere among bond traders. One trader from an asset management company remarked, "This is definitely not a market where you can take a sizable long-term bet. The state debt supply is also too big considering the current situation."

Later in the day, Indian states are set to issue bonds maturing in four to thirty years, totalling 313.5 billion rupees (approximately $3.5 billion), significantly exceeding the previously scheduled 210 billion rupees. The outcome of this auction will be crucial, as a spike in cut-off yields could push the 10-year yield towards the 6.60% mark, according to traders.

Investors are now closely monitoring the upcoming monetary policy decision from the Reserve Bank of India (RBI), expected on December 5. The central bank's stance on the key repo rate is under scrutiny, particularly in light of India's contrasting economic growth and low inflation. After a strong growth rate of 8.2% in the second quarter of the financial year, there is speculation about whether the RBI will opt for further interest rate cuts.

In terms of interest rates, India's overnight index swap (OIS) rates saw a slight dip early on Tuesday, reflecting the decrease in government bond yields. The one-year OIS rate was down nearly 2 basis points at 5.4725%, while the two-year swap fell 1.25 basis points to 5.4950%. The five-year rate also declined by 1.25 basis points, settling at 5.7925%. For context, one US dollar is equivalent to approximately 89.6340 Indian rupees, indicating the pressures faced by the local currency.

The forthcoming monetary policy meeting has generated diverse opinions among economists regarding the potential for a rate cut. While some believe that strong GDP growth may lead to a pause in rate adjustments, others argue that low inflation could provide the RBI with the flexibility needed to lower rates. Analysts are divided, with some calling for a supportive monetary stance, while others advocate for maintaining current rates to allow previous cuts to take effect fully. The central bank's decision will be closely watched by market participants, who are keen to understand the implications for future economic policy.