Indian government bonds were little changed early on Tuesday as caution ahead of the RBI's policy decision later in the week and lingering U.S.-Iran tensions kept investors on the sidelines.
The yield on the benchmark 6.48% 2035 note was at 7.0171% as of 10:00 a.m. IST, after ending at 7.0181% on Monday. Bond prices move inversely to yields.
Indian states aim to raise 241 billion rupees ($2.54 billion) through sale of bonds later in the day, which would be followed by sale of new 10-year 6.94% 2036 bond by New Delhi on Friday for 340 billion rupees.
"Traders are neither interested in aggressive trimming of positions, and definitely not in favour of adding longs, hence the move is sideways with shallow volumes," trader with a small finance bank said. The Reserve Bank of India's policy decision is due on Friday, with nearly 80% of economists in a Reuters poll conducted in May expecting the repo rate to remain unchanged.
Still, a minority of economists, including those at Standard Chartered, Capital Economics, ANZ, MUFG and OCBC, expect a rate hike. Capital Economics has not ruled out a 50-basis-points increase if Middle East tensions escalate.
The RBI is also expected to update its inflation and growth forecasts for the fiscal year ending March 2027 to reflect the fallout from the U.S.-Iran war.
Bonds have remained under pressure as a spike in crude oil prices and a weakening local currency raised the odds of an earlier-than-expected rate hike.
Indian assets are highly exposed to swings in oil prices because the country imports 90% of its crude needs.
RATES
India's overnight index swap rates were not actively traded so far, as traders await strong cues on interest rates.
The one-year swap and the two-year swap were not yet traded, while the five-year rate was marginally lower at 6.63%.
($1 = 94.9900 Indian rupees)
