India bonds likely to open lower as oil surge fuels inflation concerns

MUMBAI: Indian government bonds are likely to start the week lower, as a nearly 25% spike in oil prices fuels inflation concerns, though expectations of ongoing central bank debt purchases and open market operations could help limit losses.

The benchmark 6.48% 2035 bond yield will likely hover between 6.71% and 6.77% on Monday, a private bank trader said.

The yield had ended at 6.6898% on Friday.

Oil prices surged, with benchmark Brent crude touching $115 per barrel to its highest point since July 2022, driven by supply cuts from major Middle Eastern oil producers and concerns over prolonged shipping disruptions through the Strait of Hormuz due to the escalating conflict.

Iraq and Kuwait have started reducing oil production, adding to earlier liquefied natural gas reductions from Qatar, as the war blocked shipments from the Middle East.

Analysts predict the United Arab Emirates and Saudi Arabia may soon need to cut output as their oil storage reaches capacity.

“It would be a mayhem in bond market today, and all depends on how swiftly the Reserve Bank of India reacts,” the trader said.

RBI armour

 Bond traders hope the central bank is active in secondary market and is able to limit the upside in benchmark bond around 6.75%. The RBI will purchase bonds worth 500 billion rupees later in the day, and will follow this up with another similar quantum purchase on Friday.

The auction on Monday will also include multiple liquid notes including the former benchmark 6.33% 2035. The RBI bought bonds worth 99 billion rupees in week ended February 27, pushing purchases for February to 127.15 billion rupees, and overall bond purchases to 6.96 trillion rupees for the financial year.

Traders estimate that the RBI may have accounted for at least half of the record 580 billion rupees in bond purchases by a specific investor category last week.