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

Mumbai witnessed a significant drop in Indian government bonds on Wednesday due to a surge in oil prices triggering inflation concerns and raising doubts about further interest rate increases. The benchmark 6.94% 2036 bond yield fell to 7.4352% by 10 a.m. IST, down from 7.3920% on Monday. This yield had reached 7.4397% earlier in the day, the highest level since March 9, 2023.

Traders attribute the market shift primarily to oil's influence, suggesting it will be challenging to find substantial buying until the situation becomes clearer. Brent crude prices reached nearly $112 a barrel, the highest in five months, and maintained elevated levels across Asian markets due to concerns over Red Sea shipping and threats to Saudi oil infrastructure.

Given that India relies on imports for about 90% of its crude, it is particularly vulnerable to supply disruptions. Rising energy prices could lead to inflation, weaken the rupee, and put pressure on the government's finances. Inflation accelerated to 5.54% in September, with projections indicating it may surpass the central bank's tolerable range in October.

The Reserve Bank of India (RBI) had increased its key policy rate and adopted a "calibrated tightening" stance at its monetary policy meeting earlier this month. Market participants will closely examine the minutes from that meeting, released after trading hours on Wednesday, looking for insights into the RBI's evaluation of oil-induced inflation and its plans for successive rate hikes.

Swap markets are anticipating around 100 basis points of rate increases over the next year, with some expecting a 50-basis point adjustment during the central bank's December meeting.