India's 10-year bond yield nears 6.90% on Iran ceasefire, RBI decision awaited

Indian government bonds surged on Wednesday, as oil prices plunged after the U.S. agreed to a two-week Iran ceasefire, calming fears of an immediate escalation in the war, and resulting in bullish momentum before the central bank policy.

The benchmark 6.48% 2035 bond yield was at 6.9177% as ‌of 9:40 ⁠a.m. ⁠IST, after ending at 7.0458% on Tuesday. The Reserve Bank of India's monetary policy decision is due at 10:00 a.m. IST.

"RBI's words will resonate more than their actions. Amid a rapid shift in financial market narratives following the Middle East crisis, investors are likely to focus on the central bank's guidance. We expect policymakers to emphasize their capacity to contain domestic ⁠risks while ‌refraining from signalling a clearly hawkish policy trajectory," DBS Bank said in a note.


Benchmark Brent crude slipped over 13% ⁠and was around $95 per barrel after U.S. President Donald Trump said he had agreed to a two-week ceasefire with Iran, contingent on the immediate and safe reopening of the Strait of Hormuz.

Trump's turnaround came shortly before a deadline he had set for Iran to reopen the vital waterway, which accounts for roughly 20% of global oil flows, or face widespread attacks on its civilian infrastructure.

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

The constant ⁠rise in oil prices over the last few weeks had led to a sharp jump in bond yields and swap rates, with swaps pricing as much as 100-125 bps of rate hikes in this financial year.

RATES

India's overnight index swap rates collapsed tracking lower oil and Treasury yields.

The one-year OIS rate plunged to 5.93%, while the two-year rate fell to 6.07%. The most liquid five-year swap rate dropped 26 bps to 6.40%.