Oil-led inflation fears sap demand for Indian bonds

Indian government bonds fell on Monday, as stalled U.S.-Iran peace talks sent oil prices higher, fuelling concerns over India's inflation and fiscal outlook, while traders positioned for a potentially firmer April inflation data. The benchmark 6.48% 2035 bond yield settled 5.1 basis points higher at 7.0317%, extending ‌gains after ⁠its sharpest rise ⁠in a month on Friday. The yield on the new 10-year 6.94% 2036 bond closed up 4.1 bps at 6.9814%. President Donald Trump squashed Iran's counter to a U.S. peace proposal on Monday, raising concerns that the 10-week-old conflict will drag on. Brent crude rose 2.6% to $104 a barrel in Asian trading.

Separately, Prime Minister Narendra Modi on Sunday ⁠urged Indians to ‌conserve fuel, resume work-from-home, limit non-essential overseas travel, cut ​cooking oil ​consumption and reduce fertiliser use as surging global energy ⁠prices pressure India's foreign exchange reserves.

His remarks reinforced fears that ​energy costs and supply shortages could feed into broader ​inflation, traders said. "General thought process was prices would increase after elections, so we will wait and watch," Kruti Chheta, Mumbai-based fund manager and fixed income analyst at Mirae Asset Investment Managers (India), said. India's inflation data for April, due on Tuesday, likely moved closer to the central ‌bank's 4% target from 3.40% in March, a Reuters poll of economists showed. With energy and El Nino shocks, we ​forecast FY27 ​inflation at 5.6%, gross ⁠domestic product at 6%, and two rate hikes over the fourth quarter of 2026 and first quarter of 2027, economists at HSBC said in a ​note.


RATES

India's overnight index swap rates surged in line with bond yields. The one-year swap rate rose 7.5 bps to 5.97%, while the two-year swap rate jumped 9 bps to 6.22%. The most liquid five-year OIS rate was at 6.62%, up 6.25 bps.