INDIA BONDS-Trump tariff threat to hurt Indian rupee, bonds to see spillover impact

By Dharamraj Dhutia

MUMBAI, July 31 (Reuters) - Indian government bonds are expected to decline in early deals on Thursday, with the yield crossing key levels, as the local currency is set to drop further, while hawkish commentary from the U.S. central bank will also hurt investors.

The yield on the benchmark 10-year bond IN063335G=CC is likely to move between 6.36% and 6.40%, a trader at a private bank said, after closing at 6.3700% on Wednesday.

"There could be an upward move in yields, with the technical resistance broken, as not only is the rupee a negative trigger, but the decreasing odds of a rate cut from the Federal Reserve are further hurting," the trader said.

U.S. President Donald Trump threatened 25% levy on Indian goods, likely straining the relationship between the world's largest economy and the most populous democracy. However, Trump also added that negotiations between the two countries are still ongoing.

The Indian rupee INR=IN is set to open weaker and factors indicate that the currency will open in the 87.66-87.69 range versus the U.S. dollar, compared with 87.42 in the previous session, and closer to record low of 8795 hit earlier in the year.

Meanwhile, the Fed maintained status quo on interest rates, which was along the expected lines, but hawkish commentary from Chair Jerome Powell reduced the chances of a rate cut in September.

Powell said it is too soon to say whether the central bank will cut its interest rate target in September, and cited low unemployment and solid labour market conditions.

Traders also await fresh debt supply as New Delhi will raise 320 billion rupees ($3.65 billion) on Friday.

RATES

India's overnight index swap (OIS) rates are expected to witness paying pressure in line with bond yields.

The one-year OIS rate INR1YMIBROIS=CC ended at 5.5050%, and the two-year OIS rate INR2YMIBROIS=CC finished at 5.48%.

The liquid five-year OIS rate INR5YMIBROIS=CC settled at 5.7250%.

KEY INDICATORS:

** Benchmark Brent crude futures LCOc1 down 0.2% to $73.10 per barrel after rising 1% in the previous session

** Ten-year U.S. Treasury yield US10YT=RR at 4.3581%; two-year yield US2YT=RR at 3.9283%

** India to buyback government bonds worth 300 billion rupees

($1 = 87.6750 Indian rupees)