Indian bonds wobble on oil strain, RBI swap pullback

Mumbai witnessed a dip in Indian government bonds early Tuesday as oil prices surged past $90 a barrel, heightening concerns over the central bank's premature termination of a deposit incentive scheme. The benchmark 6.94% 2036 bond's yield rose 3 basis points to 6.8407% by 10:45 a.m. IST, up from a 5 basis point increase on Monday, its largest one-day gain in over a month.

Bond yields have an inverse relationship with prices. The Reserve Bank of India announced last week that it would close a zero-cost swap facility ahead of schedule, wrapping up a hedge provided in June to banks receiving foreign-currency deposits from non-resident Indians. The unexpected inflow of over $50 billion from the scheme spurred the early closure, while policymakers were also concerned about the domestic liquidity consequences and the expense of such financing.

"With liquidity from FCNR inflows now flowing into the five- to six-year segment and the liquid 10-year bond, the market is becoming far more exposed to fluctuations in oil prices and global interest rates," a private bank trader remarked. Brent crude prices breached the $90 mark in Asian trading for the first time in nearly three weeks.

The 60-day US-Iran ceasefire concluded on Monday, with no indication of renewal from either party. As the world's third-largest oil importer, India is particularly susceptible to oil price fluctuations. The RBI's June measures had previously stabilized markets amid an oil shock, bolstering bond demand and the rupee. The five-year note has been the most adversely affected, with its yield climbing 8 basis points on Monday and another 3.5 basis points on Tuesday to 6.4680%. Investors are now anticipating a 202-billion-rupee state debt issuance to gauge market interest.