India rates have remained elevated in recent sessions, with renewed Middle East tensions pushing crude oil back toward the $90/b mark. This energy resurgence compounds the impact of the earlier upside surprise in CPI, heightening market concerns over the prospects of RBI policy tightening. Against this backdrop, OIS yields have borne the brunt of the selloff. Along the IGB curve, the 2Y tenor has been most vulnerable despite a modest surplus in banking system liquidity, while the belly and long end have found relative support from ongoing FPI inflows.
With inflation concerns in focus, rates direction will likely hinge on the upcoming RBI meeting and developments in oil prices. We suspect that any further hawkish repricing is likely to be concentrated at the front end of the OIS curve, particularly the 1Y and shorter tenors, which have lagged the sell-off seen further out the curve and therefore appear more susceptible to catch-up repricing. That said, the magnitude of any additional sell-off could be tempered by the ample liquidity backdrop created by FCNR(B) inflows, which has pushed MIBOR lower over the past month.
As for IGBs, short-end IGBs are likely to remain elevatedamid inflation concerns. That said, with front-end yields having already repriced substantially over the past month (+22bps), the scope for a significant rise appears more limited from current levels absent a material deterioration in macro conditions. At the 5Y tenor, the IGB-OIS spread has dipped negative, which is likely a temporary market dislocation. We therefore see scope for the spread to re-widen. At the long end, the outlook appears more balanced. Concerns over fiscal and external vulnerabilities are mitigated by resilient FPI demand, with overseas investors continuing to add duration on episodes of yield concession. As a result, the 10Y G-Sec is likely to remain broadly range-bound in the near term. With 10Y yields now trading above 6.8%,today's GoI auction (31 Jul) could present an opportunity to add duration should supply-related weakness lead to a cheapening in yield. 
Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.
Topic
Explore more
E & S Macro StrategyGENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates, Digital Assets or Commodities)[1]
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
[1] This disclaimer may not apply if the applicable assets fall within the definition of 'financial instruments' that are set out in Article 2(1) EU MAR (e.g. financial instruments that are traded on a regulated market, MTF or OTF, etc.). Section C of Annex I of MiFID2 specifies these 'financial instruments'.