MUMBAI, - Indian government bonds edged higher on Tuesday as traders built positions ahead of the Reserve Bank of India's policy decision, though rising oil prices capped gains.
The benchmark 6.94% 2036 bond yield settled at 6.8152%, versus Monday's close of 6.8343%. Bond yields move inversely to prices.
The RBI is widely expected to keep its key policy rate unchanged on Wednesday, a Reuters poll showed. Traders will watch for any guidance on liquidity and revisions to RBI's economic forecasts.
"We do not forecast a rate hike at the August meeting, as the RBI may prefer to see firmer inflation prints before responding, and may also avoid making changes during the live FCNR(B) period," HSBC economists wrote in a note.
The RBI said last week it received $36.7 billion via Foreign Currency Non-Resident deposits raised by banks.
Lenders are permitted to swap these deposits with the central bank under a zero-cost hedging facility open until the end of September, which in turn creates rupee liquidity.
Aided by the rising FCNR(B) inflows and government spending, India's liquidity surplus rose to 2.44 trillion rupees on Monday, its highest in nearly 12 weeks.
Banks were seen parking some of this liquidity boost in short-term notes in the weekly state debt auction, leading to sharply lower cut off yields in the 4-year and 6-year notes.
Still, overall sentiment remained cautious as Brent crude futures rose over 2% to $85.5 in Asian trade, reversing some part of a 7% drop in the previous session.
An attack on a vessel near the Strait of Hormuz and a rebound in oil prices on Tuesday underscored doubts that the U.S.-Iran war was nearing a resolution, as Tehran pushed back against President Donald Trump's assertion that talks were under way.
RATES
India's overnight index swap rates seesawed ahead of the policy outcome.
The one-year swap rate ended at 5.8675%, while the two-year rate wrapped the session at 6.0575%. The five-year OIS rate settled at 6.3550%.
All rates fell about 1 basis point.
