India fuel tax cut deals fresh blow to bonds amid oil surge, heavy debt supply

Indian government bonds plunged after New Delhi's excise duty cut on fuel clouded the fiscal outlook, deepening market anxiety already stoked by the war-driven oil price surge and heavy debt supply.

The benchmark 6.48% 2035 bond yield was at 6.9256% as of 10:40 a.m. IST, after closing at 6.8750% in the previous session. Earlier ‌in the ⁠day, the ⁠yield hit 6.9523%, its highest since July 2024. Bond yields move inversely to prices.

"The bond market is caught in a storm of adverse triggers that have pushed yields higher. This is definitely not the end to the financial year that the regulator or market may have wanted," a trader with a private bank said.


New Delhi reduced the special excise duty on petrol to 3 rupees per ⁠litre from ‌13 rupees earlier. It also cut the duty on diesel to zero from 10 rupees as fuel prices stay volatile, with supplies choked ⁠by Middle East war.

Although India did not say how much the duty cuts would cost the government, economists have estimated the impact at 1.5 trillion-1.6 trillion rupees ($15.91 billion-$16.97 billion) for fiscal year 2027.

The move comes as Brent crude hovers at around $105 per barrel. The war has halted energy shipments through the Strait of Hormuz, which carries about one-fifth of the world's oil and liquefied natural gas supplies.

Elevated oil prices are detrimental for ‌India, the world's third-largest crude importer, threatening to worsen domestic inflation and widen the current account deficit.

Meanwhile, India retained its inflation target at 4% for the next five years.

Supply ⁠pressures have also continued to weigh on demand, with Indian states looking to raise 429.4 billion rupees through bond sales later in the day, after already raising a record 12.31 trillion rupees this financial year.

RATES

India's overnight index swap (OIS) rates witnessed heavy paying pressure as oil prices and Treasury yields stayed elevated.

The one-year OIS rate was not yet traded, while the two-year OIS rate was at 6.2850%. The liquid five-year swap rate was at 6.65%.

($1 = 94.1980 Indian rupees) ($1 = 94.2700 Indian rupees)