Fresh Middle east tensions to push Indian bonds towards caution

MUMBAI: Indian government bonds are likely to see a cautious start to the week, as crude oil prices are back in the spotlight after fresh tit-for-tat strikes by the United States and Iran in the Middle East, despite an interim peace deal.

The benchmark 6.94% 2036 bond yield is expected to trade between 6.75% and 6.79%, a private bank trader said.

It closed at 6.7690% on Thursday, the lowest level since March 20.

Bond yields move inversely to prices. Indian markets were shut on Friday for a local holiday.

“Some reversal could be seen after the recent declines, but yield may remain in 6.75%-6.80% zone for now,” the trader said.

The benchmark bond yield has dropped by an aggregate of 28 basis points over the last five weeks, tracking a sharp correction in oil prices, a major reprieve for net energy importer India, and aggressive debt purchases by foreign investors.

Oil prices were higher in Asian hours as attacks by the US and Iran underscored the fragility of their interim peace deal and again slowed energy shipping in the Strait of Hormuz.

Meanwhile, Reserve Bank of India Governor Sanjay Malhotra saidin a TV interview last week that the central bank was watching for second-round effects of higher oil prices on inflation and talks of rate hikes would be premature at this stage.

Foreign investors continue purchases of government bonds, with net buying of almost $3 billion in four weeks of June.