INDIA BONDS-India bonds head for worst month this fiscal year on rate hike bets, global pressures

By Khushi Malhotra

MUMBAI, Sept 30 (Reuters) - Indian government bonds were on course for their worst month since March, as rising oil prices spurred a global debt market rout and raised bets of rate hikes by the local central bank.

Globally, bonds were set for their worst month in years, hit by a mix of deteriorating government finances, a glut of issuances and rising inflation as the seven-month-old US-Israeli war on Iran kept energy costs elevated.

India's benchmark 6.94% 2036 bond yield was at 7.1467% at 2:10 p.m. in Mumbai, up about 20 basis points this month. The key rate jumped to a 2-1/2-year high earlier this week. Bond yields move inversely to prices.

The market is bracing for higher US and local interest rates as oil prices have sustained above $100 per barrel, raising global inflation concerns and fiscal pressures.

"There is considerable monetary tightening that RBI may have to undertake in the months ahead should no turn come to the global commodity and real rate dynamics," said Suyash Choudhary, chief investment officer, fixed income, at Bandhan Mutual Fund.

Bonds were also battered by supply fears after New Delhi raised the issuance of long-term bonds and the central bank sold the most bonds in a decade to narrow a record cash surplus that could fuel inflation.

India's retail inflation accelerated to 4.82% in August, above the Reserve Bank of India's 4% medium-term target.

The rupee was on course for a 0.8% monthly fall while shares were headed for their biggest monthly decline this fiscal.

Brent crude was set to gain roughly 14.5% this month, its strongest advance since July. The 10-year US bond yield rose 45 basis points this month, its sharpest rise in two years.

Near-term pressure on bonds could create opportunities to gradually lock into attractive yields as the tightening cycle progresses, Axis Mutual Fund said in a note.

RATES

India's one-year overnight indexed swap rate logged its biggest monthly gain since March as rate hike bets heightened.

The one-year rate was at 6.1750%, up 18 bps for the month, while the two-year rose 14 bps to 6.37%, and the five-year rate 19 bps to 6.62%.