US-Iran war escalation set to drag India bonds lower

MUMBAI: Indian government bonds are likely to dip in early deals on Thursday, continuing the trend seen in the closing hours of the previous session, as fighting in the Middle East escalated, pushing up crude oil prices.

The yield on the benchmark 6.94% 2036 note may trade in the 6.92% to 6.98% range, a private bank trader said.

It closed at 6.9431% on Wednesday.

Yields move inversely to bond prices.

“It was difficult for the momentum to sustain, the moment geopolitical tensions arose,” the trader said, adding that “we could see some more selloff today.”

Oil prices climbed, extending Wednesday’s gains to trade around $95 per barrel, as Iran declared the critical energy chokepoint, the Strait of Hormuz, fully closed after the US launched additional strikes.

Iran’s top joint military command said any vessel attempting passage will be shot at, marking a shift from recent weeks, in which Iran has facilitated the transit of some ships from friendly countries, sometimes for a fee.

The US military said no US warships have been struck in the strait, after Iran’s state media reported they were targeted by missiles and drones.

Before the war started on February 28, a fifth of global crude and liquefied natural gas supply passed through the strait. India imports about 90% of its crude oil, leaving the economy vulnerable to high oil prices.

Bond traders are still hopeful of a medium-term decline in yields after the Reserve Bank of India announced a mechanism for state-run companies to raise external commercial borrowing and for lenders to raise non-resident deposits.

These form a part of a larger set of measures to boost foreign investment in government securities and attract dollar inflows.

Foreign investors have already net bought $1.1 billion worth of bonds in the last four trading sessions.