Indian government bonds rose on Friday, with the benchmark yield posting its sharpest fall in more than a week, as softer oil prices, foreign inflows and strong demand at a weekly auction lifted sentiment.
The 6.94% 2036 bond yield fell 3.8 basis points to 6.7139%, sliding the most in a day since July 2. It ended little changed week-on-week. Bond yields move inversely to prices.
Demand at a 320 billion rupee ($3.36 billion) sale was strong, including for a 40-year note. Traders said the cutoffs showed investors were willing to add duration risk, especially with foreign demand intact.
"Foreign flows and the auction result have given bonds a near-term cushion, but traders will stay alert to U.S.-Iran war and monsoon risks," a private-bank trader said.
"A Bloomberg inclusion announcement could decide whether the rally extends."
Overseas investors have bought nearly $4 billion of Indian bonds since early June, after policy measures to support inflows have raised expectations of India's inclusion in Bloomberg's Global Aggregate Index. A decision is expected later this month.
Brent crude came off highs to trade at about $76 per barrel but still ended the week 6% higher, keeping inflation and rupee depreciation risks alive for the oil-import-dependent economy.
Bank of Baroda said risks to core inflation could intensify as companies pass on higher input costs to consumers against stable demand. Food prices may also rise as El Nino conditions build, worsening the outlook for monsoon showers.
India's monsoon deficit has narrowed to 24% as rainfall picked up across most regions. The country's June inflation print is due on Monday.
RATES
India's overnight index swap rates fell as foreign demand and stabilising oil prices spurred receiving of fixed rates.
The one-year and two-year OIS rates both fell 4.25 bps to 5.77% and 5.9175%, respectively, while the five-year swap eased 3.5 bps to 6.17%.
