India bond yields seen rising as index inclusion delay, oil rise hurts

By Dharamraj Lalit Dhutia

MUMBAI, Oct 6 (Reuters) - Indian government bond yields are expected to open higher on Thursday after the country was not immediately included in J.P. Morgan's emerging market index, dashing hopes of an addition to the influential index this year, while rising oil prices will also add to inflation worries.

The benchmark Indian 10-year government bond yield IN072632G=CC is seen in a 7.41%-7.47% band, a trader with a private bank said.

The yield ended at 7.3621% Tuesday, posting its biggest single session drop in one-and-a-half months. The market was closed on Wednesday.

"We are in for a sharp gap up opening in terms of yield, and selling pressure should continue through the day," the trader said.

"Any large scale buying is not expected immediately, and the benchmark should test 7.50% levels soon."

Indian government bonds remain on the radar for inclusion in J.P. Morgan's emerging market local currency debt index after a review on Tuesday, the bank said.

Some investors had hoped the Wall Street bank would move towards including Indian bonds this year, following Russia's exit from the GBI-EM benchmark tracked by an estimated $240 billion of funds.

However, other investors cited investment hurdles, "including a lengthy investor registration process and the operational readiness required for trading, settlement and custody of assets onshore," JPMorgan said in a statement.

Last week, Reuters reported that India's long wait to win inclusion in the index was set to be pushed into next year due to a number of issues, still some foreign banks continued adding positions on bets of positive development.

Last week, global index provider FTSE Russell said that it deferred including India in its FTSE Emerging Markets Government Bond Index.

DBS Bank said bonds could slightly sell-off, with yields rising 5-10 basis points, with a larger sell-off unlikely as index inclusion expectations were already dampened after FTSE Russell's review decision.

Meanwhile, rising oil prices will also hurt sentiment as India is one of the largest importers of the commodity and higher prices have a direct impact on inflation.

Oil prices edged up on Thursday after Organization of Petroleum Exporting Countries and allies agreed to slash oil production by about 2 million barrel per day, which would squeeze supplies in an already tight market. KEY INDICATORS: ** Brent crude futures LCOc1 was 0.2% higher at $93.60 per barrel, after rising 6% in last three sessions ** 10-year U.S. Treasury yield US10YT=RR at 3.7548%, two-year note at 4.1543%
Reporting by Dharamraj Lalit Dhutia; Editing by Savio D'Souza

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