India bond yields, rates jump as Mideast war spikes oil; RBI likely steps in

MUMBAI: Indian government bonds slumped this week as the escalating Middle East conflict triggered a spike in oil prices and stoked inflation concerns in the world’s third largest oil importer, with the central bank likely stepping in to curb losses.

Interest rate swaps jumped, especially on Friday, as offshore investors continued to brace for firm policy rates, resulting in the largest weekly rise in three years.

Oil prices had their best week in four years as Tehran halted tankers moving through the Strait of Hormuz, which handles roughly one-fifth of global oil supply.

An oil shock could raise inflation and widen the current account deficit for India, which imports about 80% of its crude oil needs.

“The spike in crude oil prices and concerns of a drawn-out disruption in the commodity’s supply is likely to pull down gilt prices owing to inflationary concerns. The risk-off sentiment has led to a sharp fall in the rupee and has raised fears of imported inflation getting pushed higher,” Nuvama said in a note.

India’s benchmark 6.48% 2035 bond yield ended at 6.6898%, rising from a six-week low of 6.6406% on Thursday.

The yield hit 6.73% during the week, but hefty purchases by a key investor segment that includes the central bank helped cap the rise. Bond prices fall when yields rise.

The rupee slumped 0.8% this week, but rebounded from a record low as the central bank sold dollars, traders said.

Rates

India’s overnight index swap rates jumped on worries that the war could drag on.

The one-year OIS rose 13 bps to 5.61%, while the two-year OIS rate jumped 19 bps to at 5.78%.

The most liquid five-year OIS rate gained 23 bps this week to end at 6.22%. The swap rates posted their biggest jump since February 2023.