India bonds end nearly flat but outlook stays bearish
Indian government bonds remained largely unchanged amid elevated oil prices and U.S. Treasury yields, impacting borrowing costs and the rupee, while inflation concerns persist.
- Elevated oil prices and their impact on India's inflation.
- The Reserve Bank of India's cautious monetary policy.
- Indian government bond and U.S. Treasury yield movements.
MUMBAI: Indian government bonds ended barely changed on Wednesday, with elevated oil prices and U.S. Treasury yields looming on the outlook for borrowing costs.
The rupee fell to another record low despite New Delhi raising tariffs on bullion imports. While the measure helped bonds early in the session, gains quickly reversed with the broader focus remaining on global factors.
Brent crude stayed above $100 per barrel, with the U.S. and Iran showing no signs of ending their conflict, now in its 11th week. India imports nearly 90% of its crude needs, and higher oil prices could stoke inflation and impact the economic growth outlook.
India’s monetary policy can look through temporary supply shocks but may intervene if inflation pressures become entrenched following the Iran war-driven oil price spike, central bank Governor Sanjay Malhotra said on Tuesday.
He further stated central banks need to be cautious, follow a policy of “gradualism” in the face of heightened uncertainty and RBI is being more and more data-dependent, taking it meeting by meeting.
Barclays expects the central bank to enact further measures, though hiking rates to defend the rupee will remain a last resort.
India’s benchmark 6.48% 2035 bond yield ended steady at 7.0493%, and has risen nearly 40 basis points since the war started at February end.
The five-year 6.36% 2031 bond yield ended at 6.8313%, ahead of its auction supply on Friday and up 3 bps from the previous session.
The spread between the two papers’ yields contracted to a two-month low.
The 10-year U.S. Treasury yield jumped to 4.47%, as inflation rose for a second straight month, leading to more brokerages pushing back forecasts of U.S. rate cuts in 2026.
Rates
India’s short-term overnight index swap rates jumped, with traders pricing in inflation risk from rising crude prices.
The one-year swap rate rose by 5.25 bps to 6.09%, while the two-year swap rate closed 1.75 bps higher at 6.2950%. The liquid five-year OIS rate settled 1.25 bps lower at 6.6550%.
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