India bonds plunge in worst fiscal since 2023 as Mideast war outweighs RBI largesse

MUMBAI: Indian bonds tumbled in the fiscal year ending March, snapping a two-year rising streak, as demand weakened and the Middle East war sent oil prices surging, outweighing the impact of record debt purchases and cash infusion by the central bank.

Elevated oil prices threaten to raise inflation and widen India’s current account deficit, and could force the central bank to start raising policy rates earlier than anticipated.

Bonds could extend their losing run in the weeks ahead, with no end to the war in sight, which will worsen the inflation and growth outlook for the world’s third-largest crude oil importer.

The yield on the 10-year benchmark government 6.48% 2035 bond ended at 7.0345% on Monday, the last working day of the fiscal, after ending at 6.9419% in the previous session. Bond yields move inversely to prices.

The yield jumped 37 basis points in March, the most since February 2017, taking its rise for the full year to 45 bps, the first and the biggest rise since fiscal 2023.

The rupee plunged past the 95 to dollar level in its worst fiscal since 2012 and stocks saw the worst March in six years.

“End of rate cut cycle dynamics have continued to be the key driver of yields since June, even as RBI still eased some more and conducted aggressive OMO purchases,” Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership, said.

“…Markets appear to be fearing that the next phase of policy tightening is closer than earlier believed, with RBI already starting to take administrative measures to curb rupee decline.”

The Reserve Bank of India slashed the key policy rate by 100 basis points to 5.25% over a year through February, along with record liquidity infusions via open market operations, secondary-market purchases, foreign exchange swaps and a reduction in banks’ cash reserve ratio.

The measures failed to have a lasting impact on bonds after the central bank changed its policy stance to “neutral” from “accommodative” in June. Its next policy decision is on April 8, and no rate action is expected.

Foreign buying of bonds dwindled with a net purchase of only around 100 billion rupees ($1.06 billion) in the fiscal year, sharply lower than 970 billion rupees and 1.3 trillion rupees over the previous two fiscals.

“The attractiveness of Indian bonds for foreign portfolio investors has diminished, largely due to a reduction in returns on a currency‑hedged basis,” Sameer Karyatt, MD and head of treasury at DBS Bank India said.