Oil-led inflation fears sap demand for Indian bonds

MUMBAI: 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 IN064835G=CC 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 LCOc1 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 rate was at 6.62%, up 6.25 bps.