India bonds gain as traders cover shorts after oil-led selloff

Indian government bonds edged higher in early deals on Tuesday, as traders saw a window to cover shorts after a sharp selloff in the previous session and paused to gauge the economic fallout of the prolonged U.S.-Iran war.

The benchmark 6.48% 2035 bond yield was at 7.0964%, after ‌shedding 3.7 ⁠basis points ⁠by 10:35 a.m. IST.

The 10-year yield jumped 7 basis points on Monday, its biggest rise in more than six weeks, tracking a selloff in U.S. Treasuries. Brent Crude futures stayed close to $100/ barrel in Asian trade, even after U.S. President Donald Trump said he had paused a planned attack against Iran after Tehran sent a peace proposal to Washington, keeping traders ⁠on edge.


India ‌imports about 90% of its crude needs, and the Middle East conflict has squeezed supplies, while a weaker rupee ⁠has added to the strain by making inbound shipments costlier and intensifying input-cost pressures across sectors.

These higher costs are likely to feed into consumer prices, weigh on demand, and squeeze corporate margins where price hikes are not feasible. Sustained commodity inflation and rupee weakness may also reduce room for further interest-rate cuts, rating agency Moody's said in a note. The Indian government has raised fuel prices, ‌import duties on gold and silver, and has urged people to work from home and avoid unnecessary travel to save fuel.

Bond traders remain wary that a ⁠sliding rupee could force an interest rate hike, even if the pressures are largely supply-driven.

USD/INR crossing 96 points towards an early onset of the central bank's rate-hike cycle, traders said.

RATES

India's overnight index swaps (OIS) eased on opportunistic receiving after aggressive paying in the previous session.

The one-year swap was down 4.25 bps at 6.2575%, while the two-year rate fell 5.75 bps to 6.5%. The five-year rate was at 6.8150%, 4.25 bps lower than Monday's close.