India bonds pressured by oil surge; RBI likely shielding 10-yr bond as Iran war set to enter third week

Indian government bonds came under ​heavy selling pressure this ​week as oil prices soared, though the benchmark 10-year bond ​showed resilience, supported by likely robust purchases by the central bank.

The benchmark 6.48% 2035 bond yield ended at 6.6798%, after closing at 6.6666% on Thursday.

The yield had ended at ‌6.6898% on ⁠March ⁠6 and 6.6601% on February 27, before the Middle East war broke out. Bond yields move ​inversely to prices.


Oil prices continued their upward move on Friday, with the benchmark Brent ​crude contract up 10% so far this week at $100.30 per barrel, after sky-rocketing 28% last week.

Risk aversion deepened as Iran, Israel and the ​U.S. vowed to fight on, even as the ⁠Middle East ‌war is set to enter its third week.

India is ​the third ​largest importer of crude oil and elevated prices have stoked ⁠inflation concerns, pulling down most bonds barring the 10-year benchmark ​that continues to hover near levels seen before the ​start of the war.

An investor group comprising the Reserve Bank of India and other long-term investors net purchased bonds worth 110 billion rupees ($1.19 billion) in the secondary market this week, while the central bank bought 1 trillion rupees of notes in open market operations.

Crude prices have jumped above $85/bbl ‌and the rupee has weakened but the 10-year bond yield has not broken the 6.72% mark, indicating the RBI may be anchoring yields, Sandeep Yadav, head of ⁠fixed income at DSP Mutual Fund, said.

RATES

Overnight index swap rates witnessed a major reaction to oil prices, with paying seen across the curve this week.

The ​one-year OIS ended at 5.8350%, while the two-year rate ended at 6.04%, up by 23 and 26 bps.

The five-year rate climbed 17 bps to 6.39%.

Analysts, however, say that OIS rates may be overstating the likely impact of the Iran war on domestic monetary policy. ($1 = 92.3060 Indian rupees)