India bonds face twin drag from rising oil, US yields

Indian government bonds weakened for a second straight day on Thursday, pressured by rising U.S. Treasury yields and crude prices holding above $100/barrel, raising inflation concerns.

Brent crude marched higher overnight after U.S. and Iran struck tankers near the Strait of Hormuz, deepening supply worries.

For India, the world's third-largest ‌oil importer ⁠and consumer, ⁠higher oil prices threaten to swell the import bill, strain government finances, stoke inflation ​and sour sentiment across financial markets.


Rising oil prices and mounting fiscal worries also sent ​the benchmark 10-year U.S. Treasury yield to its highest level since 2023 on Wednesday. It was last at 6.84%.

The Indian bond market, however, was ​insulated by a liquidity glut that limited room for ⁠selling. Banking-system liquidity ‌surplus stood at 10.49 trillion rupees ($110.30 billion) as of ​Wednesday.

The benchmark ​6.94% 2036 bond yield was perched at 6.9665% as ⁠of 10:20 a.m. IST, up 1 basis point from previous ​close. The oil spike still continued to batter ​the rupee, which slipped for a fifth day to 95.16 per dollar.

The RBI likely conducted near-maturity dollar-rupee sell-buy swaps on Wednesday, and may continue to opt for such measures, traders say, as its variable rate reverse repo operations fail to keep call rates within the policy corridor, ‌trader said.

A 25 basis-point Cash Reserve Ratio (CRR) hike to 3.25% cannot be ruled out, Axis Capital said in a note.

Focus is now ​on U.S. and ⁠India inflation prints, along with U.S. Federal Reserve's policy decision due next week.

"If mandates permit, best to put money in papers that offer carry gains ​and are inelastic, and stay there for some time," a trader at an asset manager said.

RATES

Overnight indexed swaps surge as rising U.S. yields sour mood.

The one-year rate was at 6.0150%, the two-year at 6.2050%, and the five-year hovered at 6.5075%. All three gained about 3 basis points.