Iran truce spurs best week for India bonds in over six years

MUMBAI: Indian government bonds ended their best week in six-and-a-half years on Friday, as a fragile truce between U.S. and Iran cooled oil prices and a neutral central bank policy aided sentiment.

Washington and Tehran agreed to a ceasefire on Wednesday, sending oil lower by 13%. Brent crude has remained under $100 a barrel since then despite some upswing as the fragile ceasefire showed signs of strain ahead of talks between U.S. and Iran.

India’s benchmark 6.48% 2035 bond yield fell 22 basis points this week to settle at 6.9119% on Friday, logging its biggest weekly decline since October 2019.

The rupee closed out a second consecutive week of gains against the dollar while shares in Mumbai posted their biggest weekly gain in over five years.

In the bond market, likely central bank buying and better-than-expected demand at a sale of the 10-year bond helped bonds despite a surprise cash-draining operation.

The market also drew comfort from a neutral central bank policy this week, as many traders had anticipated a more hawkish commentary.

The RBI kept its repo rate and policy stance unchanged on Wednesday, and governor Sanjay Malhotra said the central bank would continue to be proactive and pre-emptive in liquidity management while ensuring sufficient liquidity to meet the productive requirements of the economy.

“The RBI governor’s emphasis on keeping liquidity adequate and the forecast of low core inflation indicated that monetary tightening is not on the horizon,” said Puneet Pal, fixed income head at PGIM India Asset Management.

Rates

India’s overnight index swap market saw sharp receiving this week as traders pared hawkish bets after the ceasefire held for a second day.

The one-year OIS rate fell 54.2 bps this week to 5.83%, while the two-year rate eased 57.5 bps to 5.9950% and the five-year fell 55.5 bps to 6.31%.