India bonds gain as oil cools on US-Iran deal hopes

MUMBAI: Indian government bonds edged higher on Tuesday as softer oil prices spurred short-covering, though concerns over rising fuel costs, a weaker rupee and energy supply disruptions capped gains.

Brent crude futures fell 1.7% in Asian trade to about $110 a barrel after Trump said Washington had paused planned strikes on Tehran following a fresh peace proposal that could pave the way for a nuclear deal.

The benchmark 6.48% 2035 bond yield settled at 7.1101%, down 2.4 basis points from Monday’s close. Bond yields move inversely to prices.

India imports about 90% of its crude needs, making it highly vulnerable to Middle East supply disruptions. Every $10-per-barrel rise in crude oil prices, along with a related increase in gas prices, could add $22 billion, or 55 basis points of GDP, to India’s current-account deficit, Kotak Institutional Equities wrote in a note.

India’s annual wholesale inflation jumped in April to its highest in three-and-a-half years, raising concerns that price pressures could feed into consumer inflation.

The rupee also slumped to a fresh record closing low of 96.5325 per dollar on Tuesday, weakening for an eighth straight session.

The government has raised fuel prices twice in a week, increased import duties on gold and silver, and urged people to work from home and avoid travel to conserve fuel. Traders are still betting on a turn in the central bank’s rate cycle.

“Market seems to have factored in the worst and is pricing in a rate hike…which might be two policies away if the situation doesn’t get resolved,” said Kruti Chheta, Mumbai-based fund manager and fixed income analyst at Mirae Asset Investment Managers India.

Rates

India’s overnight index swaps (OIS) eased as lower oil prices boosted sentiment.

The one-year swap fell 3 bps to 6.27% and the two-year rate dropped 3.5 bps to 6.5225%. The five-year rate was down 1 bps at 6.8475%.