India bonds could open weaker as US threatens more Iran sanctions

Indian government bonds are expected to open cautiously at the start of the holiday-truncated week, amid elevated oil prices and the prospect of additional US sanctions against Iran. The benchmark 6.94 per cent 2036 bond is forecast to trade between 6.83 per cent and 6.88 per cent on Monday, after closing at 6.8495 per cent on Friday.

The next trading day, Wednesday, is a holiday for Indian debt markets. US Treasury Secretary Scott Bessent is set to brief media later in the day and has warned of imposing the most stringent sanctions on Iran to date, while President Donald Trump has also indicated he may target Tehran's trading partners with sanctions. Iran has dismissed the US plans to announce new sanctions, while President Masoud Pezeshkian has called for a diplomatic resolution.

Oil prices are currently above $92 a barrel, heightening concerns for major energy importers like India, where higher oil costs could stoke inflation and strain the current account and government finances. RBI policymakers have indicated openness to raising interest rates if inflation risks materialize and intensify. The central bank announced a near $73 billion measure to bolster India's balance of payments over the weekend, which is seen as a positive for bonds.

However, India's overnight indexed swap rates may continue to rise alongside bond yields. The one-year rate currently stands at 5.9025 per cent, the two-year rate at 6.1250 per cent, and the five-year rate at 6.42 per cent.