India bonds slip as Middle East war worsens macro backdrop

MUMBAI: Indian government bonds declined on Monday as the escalating Middle East war sent oil prices sharply higher, raising concerns over the impact on inflation and remittance flows in Asia’s third-largest economy.

The U.S.-Israeli air war against Iran expanded on Monday with no end in sight after a weekend of bombing killed Iran’s supreme leader and shut shipping traffic in the Gulf.

Oil prices surged, with the benchmark Brent crude contract spiking to the highest since January 2025, before coming off.

India relies on imports for most of its crude oil needs with the Middle East a key supplier and source of remittances.

“For India, any sustained rise in Brent prices quickly feeds into higher fuel costs, broader inflation, and a wider current account deficit and complicates the RBI’s disinflation path,” said Rajeev Sharan, head - criteria, model development and research, Brickwork Ratings.

The benchmark 6.48% 2035 bond yield ended at 6.6753% against the previous close of 6.6601%. The yield had risen to 6.7064% earlier in the day, at which point buyers returned to the market. Bond yields move inversely to prices.

The Indian rupee fell 0.5% to 91.47 per dollar, while shares declined 1.3% in their worst fall in a month.

Rates

India’s overnight index swap rates rose but also ended off highs after hitting technical resistance levels.

The one-year OIS ended at 5.5000%, while the two-year closed at 5.6275%. The five-year OIS settled at 6.0275%.