INDIA BONDS-India bonds rise tracking US peers; RBI policy in focus

By Khushi Malhotra

MUMBAI, Aug 4 (Reuters) - Indian government bonds edged higher in early deals on Monday, with bulls lapping up debt after an uptick in U.S. Treasuries, ahead of the Reserve Bank of India's (RBI) rate setting outcome this week.

The yield on the benchmark 10-year bond IN063335G=CC was at 6.3366% as of 10:00 a.m. IST, compared with Friday's close of 6.3680%.

Bond yields move inversely to prices.

"With domestic inflation undershooting expectations and softer non-farm payrolls data in the U.S., people will be comfortable with rates," said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank.

"The domestic bond yield curve may see some bullish steepening," Tripathi said, adding that 6.33% is a crucial level for the 10-year benchmark paper.

"If breached, we may go towards previous lows."

The yield on the U.S. 10-year bond US10YT=RR was at 4.2454% in Asian hours, after a weak jobs data raised bets for a Federal Reserve rate cut in September.

Meanwhile, the RBI is widely expected to keep its key interest rate unchanged on Wednesday, according to a majority of the economists polled by Reuters.

Bets for another rate cut have risen after the U.S. last week slapped steep tariffs on Indian exports, which is likely to pressure growth even as inflation remains subdued.

India's annual retail inflation slowed to a more than six-year low of 2.10% in June, near the lower end of the RBI's tolerance band, and is expected to drop to a record low in July.

RATES

India's overnight index swap (OIS) rates witnessed strong receiving interest in early trading as U.S. Treasury yields drop, triggering a decline in domestic bond yields.

The one-year OIS rate INR1YMIBROIS=CC dipped 5 basis points to 5.4550% and the two-year OIS rate INR2YMIBROIS=CC dropped 5 bps to 5.4200%. The liquid five-year OIS rate INR5YMIBROIS=CC lost 5 bps to 5.6625%.