India bonds to come under selling pressure at start of new week as oil spike continues

Indian government bonds may face selling pressure at the beginning of the new week due to elevated oil prices, which have raised concerns about inflation and could lead the central bank to adopt a more hawkish stance. The yield on the 6.94% 2036 bond could trade within the range of 7.45% and 7.50%, according to a trader, after closing at 7.4740% the previous day.

The benchmark 10-year bond yield increased by 9 basis points on Friday, contributing to a 62 basis point rise over the last nine weeks, marking the longest continuous weekly rise since 1998. A trader stated that "we could see some selling pressure," although added that "since oil has come down from highs today, the dreaded figure of 7.50% may still be a little away."

Oil prices reached a high of over $117 per barrel, the highest level in almost six months, on Friday due to Houthi attacks in Saudi Arabia, which increased concerns about potential disruptions to oil supplies. However, the contract saw a slight dip in Asian trading hours on Monday. India is particularly susceptible to higher energy prices as it relies on foreign oil imports for nearly 90% of its needs.

Elevated prices can exacerbate inflation, affect the rupee, and strain government finances. The Reserve Bank of India increased the repo rate and changed its stance earlier in the month, signaling more rate hikes, while markets now anticipate over 100 basis points of hikes within the next year, based on overnight indexed swaps. The US Federal Reserve's monetary policy decision is scheduled for Wednesday evening, and market focus will shift to the outcome, looking beyond the anticipated pause for clues on further rate hikes in 2023.