India bonds return near March-end lows after volatile month; oil, treasuries add to downside risks

Indian government bonds ended April close to levels seen at the end of the month prior after declining on Thursday, as crude oil prices and Treasury yields surged, though dovish central bank policy helped calm some nerves.

The local currency hit a record low on Thursday after Brent crude topped $126 a barrel, a level last seen in March 2022 after Russia invaded Ukraine. Higher oil prices ‌are a key inflationary ⁠and ⁠fiscal risk for net energy importer India.

The benchmark 6.48% 2035 bond yield closed at 7.0148% on Thursday, up from 6.9928% ​on Wednesday. The benchmark yield touched a high of 7.1421% and a low of 6.8648% over the course ​of the month, after ending March at 7.0345%.


Even in a best case scenario of a lasting truce between the U.S. and Iran being reached soon, "we expect the fiscal and inflation impacts of ​recent geopolitical concerns to last much longer, which may in turn ⁠put pressure ‌on currency and on fixed income yields over the medium term," said ​Sudhir Agrawal, fund manager ​at SBI Mutual Fund.

Brent crude oil prices remained above $100 per barrel ⁠for most of April with no peace deal in sight, even ​as the U.S. announced a two-week ceasefire with Iran on April 7 ​which it then extended indefinitely.

The 10-year U.S. Treasury yield touched its highest level in five weeks earlier in the session, after the Federal Reserve's most divided rate decision since 1992 dimmed the prospects for rate cuts, as rising energy prices stoke inflation worries.

U.S. President Donald Trump spoke with oil companies about limiting the impact of a possible months-long blockade of Iranian ports.

Iran for its part, ‌has largely shut the Strait of Hormuz, which carries about a fifth of global energy supplies.

For oil-import-dependent India, the Reserve Bank of India has said a 10% rise in oil prices above $85 could ⁠raise inflation by 50 basis points and cut growth by 15 basis points.

The RBI had maintained status quo on policy rates and stance earlier this month and said it will maintain a ​comfortable liquidity surplus, assuaging fears of an early onset of a rate hiking cycle.

RATES

India's overnight index swap rates surged sharply laterin the month, after a dip in the first half, but still ended lower for this month on the central bank's assurance.

The one-year OIS rate ended at 5.9950%, while the two-year swap rate closed at 6.23% on Thursday. The five-year OIS rate settled at 6.61%.