India bonds dip as Middle East war woes add to policy week caution

Indian government bonds retreated early Monday as traders braced for the central bank's Friday policy decision and as a lack of resolution in the Middle East conflict pushed oil prices higher.

The benchmark 6.48% 2035 yield climbed 2 basis points to 7.0249% by 10:45 a.m. IST, after ending Friday at 7.0037%. ‌The yield had ⁠fallen 6 ⁠basis points last week, its biggest weekly drop in seven weeks.

Brent crude futures rose 1.38% to $93.32 in Asian trading after Israel deepened its push into Lebanon.


Israeli Prime Minister Benjamin Netanyahu said Sunday he had ordered troops to advance against the Iran-backed Hezbollah militant group, even as ceasing hostilities against Israel's northern neighbour is among Iran's conditions for ending the war.

For India, every $10 increase per barrel ⁠in oil ‌prices can add 700-800 billion rupees to the annual import bill, analysts at Bajaj Mutual Fund said in a note.

The Reserve Bank ⁠of India's monetary policy decision on June 5 also looms, with nearly 80% of economists in a May 22-29 Reuters poll expecting the repo rate to be held unchanged despite growing calls for a hike.

Standard Chartered, Capital Economics, ANZ, MUFG and OCBC are among those pencilling in an increase.

"I am of the wait-and-watch camp and I believe the oil prices will drop in coming months," said Alok Singh, head ‌of treasury at CSB Bank.

The RBI is set to refresh its inflation and growth projections for the year ending March 2027, while investors will also parse Friday's January-March ⁠GDP data to gauge the impact of the Iran war on the economy. Retail inflation could rise as a result of recent fuel price hikes and weaker-than-normal monsoon rains, the country's finance ministry said in a report on Saturday.

RATES

India's overnight index swap rates surged on Monday as traders priced in higher oil, which contributed to rate hike bets.

The one-year swap was up 4 bps at 6.13%, while the two-year and five-year rates rose 5 bps each to 6.29% and 6.66% respectively.