India bonds unchanged as elevated oil, heavy state supply keep up pressure

MUMBAI: Indian government bonds ended largely unchanged on Tuesday, as oil prices staying well above $100 per barrel kept the focus on macroeconomic risks and the market digested hefty debt supply.

The U.S.-Israeli war on Iran is in its third week with no end in sight. Brent crude was near $103 per barrel with the Strait of Hormuz mostly shut and U.S. allies refusing to send warships to help tankers navigate the vital waterway that handles about 20% of global oil flows.

Oil prices also rose as Iranian attacks on the United Arab Emirates rekindled supply fears. Brent has surged more than 40% since the Iran war began on February 28.

Higher oil prices threaten to raise inflation in India, the world’s third-largest crude importer. India’s benchmark 6.48% 2035 bond yield, which has risen 5 basis points over this period, settled at 6.7143% on Tuesday, against 6.7059% at the previous close.

Bond yields move inversely to prices.

“The conflict in Middle East will be tracked, with focus on the FY27 borrowing calendar amidst fears of increase in fiscal deficit if the Brent stays above $100/barrel,” Nuvama said in a note.

Indian states raised 575.25 billion rupees ($6.2 billion) in what was the largest state debt sale of this financial year, pushing the tally for the fiscal to a record 11.45 trillion rupees.

Traders await follow-up bond purchases from the Reserve Bank of India, after the central bank bought 1 trillion rupees through open market operations and 572 billion rupees in the secondary market since the Mideast war started.

Rates

India’s overnight index swap rates ended lower, as some traders bet that rates could cool, following a recent surge.

The one-year OIS ended at 5.795%, while the two-year OIS rate closed at 5.99%. The five-year swap rate settled at 6.38%.