Indian bonds tumble on oil surge, RBI rate hike fears

Indian government bonds tumbled for a third straight session on Thursday, pushing the benchmark yield past its psychological level of 7.45% as oil prices notched fresh highs and minutes of the central bank's latest policy meeting signalled further rate hikes.

The benchmark 6.94% 2036 bond yield ended at 7.4596%, after closing at 7.4427% in the previous session. The yield has risen 69 basis points over the last 10 weeks. Yields move inversely to prices.

The Reserve Bank of India raised the repo rate to 5.50% earlier this month, its first hike in nearly four years, and shifted its stance to "calibrated tightening", hinting at more hikes.


Higher oil prices and US yields are driving up bond yields across emerging markets, including India, said Tanuj Khosla, managing director and head of multi-strategy credit at InCred Global Asset Management.

"Unless Brent retreats meaningfully from $112, I expect the benchmark yield to test 7.50-7.60% before year-end, with the RBI likely forced to hike in December."

Oil prices climbed further in Asian trading to $112.50 per barrel, with benchmark Brent crude hitting its highest level since May, after more Houthi attacks in Saudi Arabia stoked concerns over a broader escalation of conflict and further disruptions to crude oil supplies.

A sharp rise in oil prices due to the Middle East war and higher food prices following a deficient monsoon have fuelled inflation concerns in India, with economists expecting retail inflation to breach the central bank's 6% upper tolerance limit.

India is particularly vulnerable to elevated energy prices as it imports nearly 90% of its requirements. Perpetually elevated prices risk feeding into inflation, impacting the rupee and government finances.

RATES

India's overnight indexed swap rates ended largely unchanged, as most of the bearish factors were already priced in.

The 1-year OIS ended at 6.56%, while the 2-year rate closed at 6.63%. The liquid 5-year rate settled at 6.8%.