INDIA BONDS-India 10-year bond yield tests key level amid weaker rupee, hawkish Fed

By Dharamraj Dhutia

MUMBAI, July 31 (Reuters) - Indian government bonds fell in early deals on Thursday, with the benchmark yield testing a key technical level, as a drop in the rupee and hawkish commentary from the U.S. central bank pressured sentiment.

The yield on the benchmark 10-year bond IN063335G=CC was at 6.3725% as of 10:10 a.m. IST after closing at 6.3700% on Wednesday.

"It seems to be a fight between bears and bulls and both the camps want to take the 10-year bond yield to above or below 6.38%," a trader with a primary dealership said, adding it will be interesting to see where the yield closes on Thursday.

The Indian rupee INR=IN dropped to a six-month low of 87.74 against the U.S. dollar and hovered near a record low of 87.95 hit in February.

The local currency plunged after U.S. President Donald Trump threatened a 25% levy on Indian goods, likely straining the relationship between the world's largest economy and the most populous democracy. Trump, however, said that negotiations between the two countries are still ongoing.

Meanwhile, the Federal Reserve maintained status quo on interest rates, as expected, on Wednesday, but hawkish commentary from Chair Jerome Powell, who cited low U.S. unemployment and solid labour market conditions, have lowered the chances of a rate cut in September.

The odds of a September reduction have fallen to 43% from 63% before the Fed decision, according to the CME FedWatch tool.

Traders are also watching out for fresh debt supply as New Delhi is set to raise 320 billion rupees ($3.65 billion) through the sale of 15-year and 40-year bonds on Friday.

RATES

India's shorter duration overnight index swap (OIS) rates saw mild receiving after opening higher earlier, while the long-end swap rate was little changed.

The one-year OIS rate INR1YMIBROIS=CC was at 5.49%, and the two-year OIS rate INR2YMIBROIS=CC finished at 5.4750%. The liquid five-year OIS rate INR5YMIBROIS=CC was at 5.7250%.

($1 = 87.6080 Indian rupees)