India bonds surge on Bloomberg index hopes, oil-led inflation relief

MUMBAI: Indian government bonds rose sharply on Thursday, as growing foreign demand driven by hopes of inclusion in Bloomberg’s flagship bond index and easing inflation concerns from lower oil prices lifted prices.

The benchmark 6.94% 2036 bond yield ended at 6.7180%, down from 6.7563% on Wednesday. Bond yields move inversely to prices.

Falling oil prices after the U.S.-Iran interim peace deal, and rising foreign inflows have pushed India’s sovereign yield curve sharply lower from a month earlier, reducing the government’s borrowing costs.

Foreign investors have bought a net of 324 billion rupees ($3.40 billion) of bonds since the beginning of June, driven by tax relief measures, a steadier rupee and expectations that India could be included in Bloomberg’s Global Aggregate Index, with a decision expected in July.

Concerns about inflation and growth have eased as oil prices retreated, with RBI Governor Sanjay Malhotra saying India is unlikely to raise its inflation target and that the economy should continue to grow at a strong pace.

A deficient monsoon, however, has kept traders cautious.

“While the risk to inflation from energy prices has moderated, the prospects of a poor monsoon in 2026 are emerging concerns,” rating agency CareEdge wrote in a note.

Rising global yields also pose a risk to the rally in Indian government bonds, as a narrowing differential with bonds of developed economies reduces the appeal of riskier emerging market debt.

The U.S. 10-year yield has climbed 11 bps since May 1, even as oil prices have cooled from a peak of more than $120 a barrel. Its spread with the Indian benchmark 10-year note has narrowed to around 220 bps, the lowest since September 2025.

Rates

India’s overnight index swap rates were little changed as pressure from offshore paying limited their slide. The one-year rate was at 5.7850%, while the two-year swap closed at 5.93%. The five-year rate lowered slightly to 6.1975%.