India bonds pressured by oil surge; RBI likely shielding 10-yr bond as Iran war set to enter third week

MUMBAI: Indian government bonds came under heavy selling pressure this week as oil prices soared, though the benchmark 10-year bond showed resilience, supported by likely robust purchases by the central bank.

The benchmark 6.48% 2035 bond yield ended at 6.6798%, after closing at 6.6666% on Thursday.

The yield had ended at 6.6898% on March 6 and 6.6601% on February 27, before the Middle East war broke out. Bond yields move inversely to prices.

Oil prices continued their upward move on Friday, with the benchmark Brent crude contract up 10% so far this week at $100.30 per barrel, after sky-rocketing 28% last week.

Risk aversion deepened as Iran, Israel and the U.S. vowed to fight on, even as the Middle East war is set to enter its third week.

India is the third largest importer of crude oil and elevated prices have stoked inflation concerns, pulling down most bonds barring the 10-year benchmark that continues to hover near levels seen before the start of the war.

Indian rupee hits record low as oil risks, offshore dollar bids mount

An investor group comprising the Reserve Bank of India and other long-term investors net purchased bonds worth 110 billion rupees ($1.19 billion) in the secondary market this week, while the central bank bought 1 trillion rupees of notes in open market operations.

Crude prices have jumped above $85/bbl and the rupee has weakened but the 10-year bond yield has not broken the 6.72% mark, indicating the RBI may be anchoring yields, Sandeep Yadav, head of fixed income at DSP Mutual Fund, said.

Rates

Overnight index swap rates witnessed a major reaction to oil prices, with paying seen across the curve this week.

The one-year OIS ended at 5.8350%, while the two-year rate ended at 6.04%, up by 23 and 26 bps.

The five-year rate climbed 17 bps to 6.39%.

Analysts, however, say that OIS rates may be overstating the likely impact of the Iran war on domestic monetary policy.