India bonds to decline on elevated oil, hawkish RBI

MUMBAI: Indian government bonds are likely to weaken on Monday, as elevated oil prices stoke inflation worries, adding to pressures from a hawkish central bank and rate-hike expectations.

The benchmark 6.94% 2036 bond yield may trade between 7.37% and 7.42%, according to a trader at a primary dealership, after closing at 7.3789% in the previous session.

Bond yields rise when prices fall.

Brent crude futures fell $1.94, or 1.77%, to $107.92 a barrel by 0227 GMT after settling at its highest since May 19 on Friday.

Despite Monday’s pullback, escalating tensions in the Middle East supported crude oil, even as US President Donald Trump waived sanctions and tariffs on Russia that may lead to more Russian fuel exports.

“Rising oil prices are a clear headwind for Indian bonds as it will further push the central bank to stay hawkish for a longer period, which will put upward pressure on yields,” the trader said.

Constantly elevated energy prices hit an import-dependent India, as they could feed into the nation’s inflation trajectory, impact the local currency, and destabilise government finances.

India’s September consumer inflation accelerated to 5.54%, on track to cross the 6% upper end of the central bank’s tolerance band in October, according to a majority of economists polled by Reuters.

Reserve Bank of India Governor Sanjay Malhotra said last week the central bank may use monetary policy to safeguard financial stability.

The RBI is expected to tighten financial conditions further to stem capital outflows and raise the cost of shorting the rupee, sources and analysts told Reuters.