Oil rally weighs on Indian bonds, value buyers limit fall

Indian government bonds fell for a fourth straight session on Wednesday, as a sustained rally in oil prices clouded India's macro outlook, with bargain buying cushioning the slide.

The benchmark 6.94% 2036 bond yield settled 1 basis point higher at 6.8012%, holding firm at its ‌highest level since ⁠June ⁠24.

Benchmark Brent crude rose 3.3% to a six-week high of $94 a barrel in Asian trade, as supply fears intensified.


U.S. forces struck Iranian military targets for an 11th straight night while three Saudi crude carriers bound for China and India diverted from the Red Sea following warnings from Houthi militia.

Indian assets are highly sensitive to oil swings ⁠as the country ‌imports about 90% of its crude needs. The rupee weakened to a two-month low of 96.5650 per dollar on ⁠Wednesday and benchmark equities logged their biggest daily loss in two weeks.

For bonds, likely value buying from state-run banks limited some of the losses, with investors betting on a possible resolution to the U.S.-Iran conflict after signs that both sides were open to talks.

Overseas investors have also remained strong buyers, purchasing $4.3 billion worth of bonds under the Fully Accessible Route since June ‌1. The pace of the inflows is expected to slow after the buying spree, analysts said.

If the index provider announces India will be ⁠included in Bloomberg's global bond index, small quantums of overseas inflows will continue ahead of the inclusion, expected in fiscal 2028, according to Gaura Sen Gupta, chief economist at IDFC First Bank.

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Overnight index swaps extended their climb on oil surge, tighter liquidity.

The one-year swap ended at 5.9950%, 2.5 bps higher, the two-year rose 4 bps to 6.1750%, and the five-year jumped 3.75 bps to 6.475%.