India bonds slip as oil risks eclipse index entry hopes

MUMBAI: Indian government bonds slipped on Monday as renewed U.S.-Iran strikes sent oil prices higher and battered the rupee, outweighing optimism over a potential entry into Bloomberg’s flagship bond index.

U.S. and Iranian forces exchanged heavy missile and drone attacks over the weekend and into Monday, with Tehran saying it has shut the Strait of Hormuz, pushing up oil prices and fanning inflation worries across the globe. Brent Crude futures rose 3.5% to $78.61 per barrel.

The local currency slipped 0.31% to more than a one-month-low of 95.62 per dollar.

The benchmark 6.94% 2036 bond yield settled higher at 6.7309%, compared with 6.7139% on Friday. Bond yields move inversely to prices.

In India, June’s consumer inflation reading on Monday showed inflation breaching the central bank’s 4% target for the first time in 16 months.

Retail inflation accelerated to 4.38% as fuel and food costs rose on the back of the Iran war-fuelled supply concerns and a delay in monsoon rains.

“An unfavourable base and deficient monsoon rainfall on account of El Nino weather conditions point to further rise in food inflation over the coming months,” Capital Economics said in a note.

India’s inclusion in Bloomberg’s Aggregate Global Bond Index, a decision on which is expected this week, will provide support for bonds, traders said.

Foreign demand has stayed strong in the anticipation of the inclusion, lending support to the market. These investors have bought more than $1 billion of bonds under the so-called fully accessible route in July.

Strategists at HSBC said foreign inflows into Indian government bonds are likely to remain elevated as India’s recent bond market reforms offer a compelling narrative.

Rates

India’s overnight index swap rates jumped on hedging demand.

The 1-year rate rose 6 basis points to 5.83%, while the 2-year rate surged 5.5 bps to 5.9725%. The most liquid 5-year swap rate jumped 6.75 bps to 6.2350%.