India bond rally survives US-Iran war, oil flare-up in RBI policy afterglow

MUMBAI: Indian government bonds advanced on Monday, defying an oil price spike triggered by escalation in the war in the Middle East, as optimism over the Reserve Bank of India’s softer policy tone and steps to attract foreign inflows supported sentiment.

The yield on the benchmark 6.48% 2035 note fell 2.4 bps to 6.9532% on Monday, its lowest in a month.

The session marked an extension of gains from Friday when the RBI held its key policy rate and announced a raft of measures to draw large foreign inflows to government securities.

The central bank said it will offer cheaper currency swaps for overseas borrowing by public-sector companies and lenders, and provided full hedging cover for banks raising three- to five-year foreign currency deposits from non-resident Indians.

“We believe the FNCR (B) scheme alone could potentially attract deposits worth 1% of GDP, which places the amount at a sizeable $40 billion,” analysts at Nomura said in a note.

New Delhi also scrapped taxes on interest income and capital gains from sales of government bonds last Friday.

India’s 10-year bond yield fell for a third day on Monday even as higher U.S. Treasury yields and oil prices capped gains.

Brent crude jumped 4% to $96.34 a barrel in Asian trading after Israel struck Lebanon on Sunday, eroding hopes for an end to the wider conflict and a full resumption of shipping flows through the Strait of Hormuz. The U.S. 10-year Treasury yield rose 2 basis points in Asian trading to 4.55%.

India imports about 90% of its crude oil, leaving the economy highly vulnerable to swings in oil prices.

Rates

Overnight index swaps edged higher on oil-driven caution. The one-year swap was slightly up at 6.0475%, while the two-year rate rose marginally to 6.24%. The five-year rate was flat at 6.5375%.