Interim Budget 2019: In the run-up, sovereign bond yield up 18 bps to 7.6%

Meanwhile, the Reserve Bank of India's liquidity supportive stance also continues and the last tranche of OMOs for January is lined up for Thursday

The yields on India's benchmark sovereign bonds were hovering around 7.6 per cent ahead of the country's interim budget, according to a report by Singapore banking group DBS.

The yields of the most traded 2028 INR sovereign bond were bid in the 7.5-7.6 per cent range and are up around 18 basis points since late-2018.

"Yields of the new 10-year are supported above 7.3 per cent, with last Friday's auction (for 5-year, 10-year) attracting interests by a large corporate which resulted in a short-squeeze amongst the other participants," according to DBS.

Meanwhile, the Reserve Bank of India's liquidity supportive stance also continues and the last tranche of open market operations (OMOs) for January is lined up for Thursday.

In February, the RBI plans to buyback bonds worth Rs 375 billion, taking the FY19 haul to Rs 2.86 trillion.

The report further noted that the next event risk for the INR bond markets is the ensuing Interim budget for financial year 2019-20.

Coming ahead of the general elections in April-May 2019, the interim budget will express the intent of the government, it will outline expenditure and revenue projections for FY20, assuming the incumbent is voted back to power.

An overview of the past five years' achievements and blueprint for the upcoming year is also expected to be a part of the announcement, according to the DBS report.

"With the FY19 target of 3.3 per cent of GDP likely to be met (any slippage to be limited to 3.5 per cent), we expect the FY20 deficit target to be set higher at 3.2-3.3 per cent vs recommended 3.1 per cent," wrote DBS Group Research economist Radhika Rao and Strategist Duncan Tan.

Opposition political parties have meanwhile upped the ante, as the Congress party promised to provide a 'Minimum Income Guarantee' to the poor if voted to power, increasing pressure on the incumbent to address the ongoing farm distress.

"If fiscal deficit targets are along our expectations, bond markets are unlikely to witness big swings," wrote the duo.

However, if the borrowing scale surprises on the upside, expect the 2028 yields to test past 7.65 per cent in a knee-jerk reaction, the report said adding that if the scale is along expectations or lower, there could be a relief rally of 5-10 basis points in the new and old papers.