Fresh US-Iran hostilities add to Indian bond jitters in RBI policy week

MUMBAI: Indian government bonds are likely to open lower on Wednesday as renewed US-Iran military clashes in the Middle East push up oil prices, putting hopes of a peace deal on the backburner, while the major focus remains on the central bank’s Fridaymonetary policy decision.

The yield on the benchmark 6.48% 2035 note is expected to trade in the 7.00% to 7.06% range, a private bank trader said. It had ended at 7.0129% on Tuesday.

Bond prices move inversely to yields.

Crude oil prices jumped on Tuesday and extended those gains by climbing 1%in early Asian trading hours on Wednesday as hostilities in the Middle East erupted anew with Iran firing missiles at Kuwait and Bahrain, while diplomatic talks between Iran and the US made little progress.

Indian assets are highly exposed to swings in oil prices, with the country importing 90% of its crude needs.

“Escalation in US-Iran tensions and such a major reaction in oil prices is exactly what bond traders were fearing,” the trader said. Meanwhile, nearly 80% of economists in Reuters’ May 22-29 poll expect India’spolicy repo rate to remain unchanged when the Reserve Bank of India’s monetary policy decision is unveiled on Friday.

Bonds have remained under selling pressure as a spike in oil prices and a weakening local currency raised the odds of an earlier-than-expected rate hike.

There is clamour from a minority of economists and analysts for a rate hike, including Standard Chartered, Capital Economics, ANZ, MUFG and OCBC.