MUMBAI: Indian government bonds logged a monthly loss in July, their first drop in four months, as a withering U.S.-Iran peace deal yanked oil prices and U.S. Treasury yields higher, clouding India’s economic and interest rate outlook.

The yield on the benchmark 6.94% 2036 bond ended at 6.8343% on Friday, up 2 basis points on the day. The 10-year yield had declined more than 28 basis points for three straight months till June before rising about 8 bps in July.

Bond yields move inversely to prices.

A fragile U.S.-Iran peace deal fell apart this month, with the war embroiling more countries across the Gulf, and shipping disruptions widening to other key oil chokepoints.

Brent crude futures were 22% higher in July, their biggest monthly surge since March, while the 10-year U.S. yield also gained about 25 basis points.

For India, crude oil remains the single most important external macro variable, Axis Mutual Fund said in a note.

India bonds slip on Fed uncertainty, war worries

Towards the month-end, foreign investors also began dumping Indian government bonds, rattled by the oil price surge and the absence of any announcement on India’s inclusion into Bloomberg’s global bond index.

Attention is now on the Reserve Bank of India’s monetary policy decision on Wednesday, where it is widely expected to keep its key interest rate unchanged.

“We expect the MPC to retain a cautious tone on the outlook, particularly around El Niño-related weather risks and the still-elevated uncertainty from Middle East geopolitical tensions,” Goldman Sachs said.

The decision comes after the Federal Reserve held interest rates on Wednesday, though Chair Kevin Warsh’s inflation-focused commentary did not give clear guidance on the future rate path.

Inflows from RBI’s June policy measures, however, offered some support, as the central bank has received about $32 billion of inflows.

Rates

India’s overnight index swap rates also jumped in tandem with bond yields, posting their biggest surge since March.

This month, the one-year swap rate rose 16 bps, two-year swap rate jumped 21.5 bps and the five-year OIS rate climbed 23.5 bps.