India bonds face twin drag from rising oil, US yields

Mumbai, India - Indian government bonds continued to decline for a second day on Thursday, as higher US Treasury yields and oil prices above $100 per barrel raised inflation concerns. The price of Brent crude oil surged following the collision of US and Iranian tankers near the Strait of Hormuz, exacerbating supply concerns for India, the third-largest oil importer and consumer globally.

Higher oil prices could increase the country's import bill, burden government finances, fuel inflation, and negatively impact financial markets.

The benchmark 10-year US Treasury yield reached its highest level since 2023 at 6.84% on Wednesday, while the Indian bond market found solace in a liquidity surplus of 10.49 trillion rupees ($110.30 billion). The yield on the benchmark 6.94% 2036 bond was 6.9665% at 10:20 a.m. IST, up 1 basis point from the previous close. The rupee continued to weaken, slipping for the fifth consecutive day to 95.16 per dollar.

India's Reserve Bank might have executed dollar-rupee sell-buy swaps on Wednesday to manage the situation, and may continue to do so, as variable rate reverse repo operations fail to maintain call rates within the policy range. The central bank's focus now rests on US and India's inflation data, as well as the Federal Reserve's policy decision expected next week.

Traders suggest that if monetary authorities permit, investing in securities offering carry gains and exhibiting low price sensitivity may be a prudent strategy for the time being.