Govt bonds sell off on oil shock ahead of RBI policy minutes

Indian government bonds plummeted on Wednesday due to a surge in oil prices, raising inflation fears and heightening concerns about potential further interest rate increases, according to wire material. The yield of the benchmark 6.94% 2036 bond reached 7.4352% at 10 a.m. IST, having closed at 7.3920% on Monday. Indian debt markets were closed on Tuesday for a local holiday.

The yield had climbed to 7.4397% earlier in the day, marking its highest level since March 9, 2023. Traders noted that oil is currently driving the market, and it appears unlikely that there will be significant conviction-based buying until the situation becomes clearer. Brent crude prices neared $112 a barrel, the highest level in five months, and remained elevated throughout Asian hours due to concerns over Red Sea shipping risks and threats to Saudi oil infrastructure.

India relies on imports for nearly 90% of its crude oil and is particularly vulnerable to supply disruptions. Persistently high energy prices could drive up inflation, weaken the rupee, and strain government finances. In September, India's consumer inflation surged to 5.54%, and economists predict it could exceed the central bank's tolerance range in October.

The Reserve Bank of India (RBI) increased its key policy rate and changed its stance to "calibrated tightening" during its recent monetary policy meeting. Investors will be closely examining the minutes of that meeting, scheduled to be released after market hours on Wednesday, for insights into the RBI's assessment of oil-driven inflation and its plan for future rate hikes.

Swap markets anticipate roughly 100 basis points of rate increases over the next 12 months, including predictions of a 50 basis points move at the December meeting. India's overnight indexed swap (OIS) rates have risen in tandem with oil prices and Treasury yields. The 1-year OIS rate stood at 6.58%, the 2-year rate at 6.66%, and the liquid 5-year rate at 6.84%.