Indian bonds post first weekly decline in three as oil resumes upward journey

Indian government bonds were little changed on Friday, but posted their first weekly decline since April 3, as oil prices started climbing again, with market participants seeing no resolution to the U.S.-Iran conflict.

India's benchmark 6.48% 2035 bond yield ended at 6.9365% after closing at 6.9498% on Thursday. ‌The yield ⁠rose 4 basis ⁠points this week, after declining by an aggregate of 23 bps in the last ​two weeks.

"The market is currently under the grip of negative sentiment due to the ​ongoing West Asia conflict. This has resulted in a sharp market correction, with the 10-year bond yield up over 30 bps higher than pre-war ​levels," Vikas Garg, head of fixed income at ⁠Invesco Mutual ‌Fund said.


Oil prices rose on Friday, a trend which was observed through the week on deepening fears of renewed ⁠escalation in the Middle East, especially after Iran released footage of commandos boarding a cargo ship in the Strait of Hormuz.

Elevated oil prices are negative for India, which depends on imports for nearly 90% of its crude requirements, as it could raise the nation's import bill as well as impact inflation and fiscal deficit.

The RBI has not ruled out second-round effects on inflation if the conflict ‌drags on, Deputy Governor Poonam Gupta- told the Economic Times in an interview published on Friday.

The benchmark Brent crude ​contract was ​around $107 per barrel, surging ⁠almost 50% since the U.S.-Iran war began on February 28.

RATES

India's overnight index swap (OIS) rates continued their upward momentum through the week, tracking a rise in ​bond yields as well as oil prices, which has again brought talks of rate hikes into the picture.

The one-year OIS rate ended at 5.88%, while the two-year swap rate closed at 6.10%. The liquid five-year OIS rate settled at 6.47%. Swap rates were up by 7-9 bps.