Oil shock hammers India bonds before policy minutes, 10-year yield at over 3-year high

MUMBAI: Indian government bonds slid on Wednesday, with the benchmark yield hovering near its highest level since March 2023, as elevated oil prices fuelled inflation concerns, while traders awaited minutes of the central bank’s latest policy meeting.

The benchmark 6.94% 2036 bond yield ended at 7.4427% after ending at 7.3920% on Monday. Indian debt markets were shut on Tuesday for a local holiday. Bond yields move inversely to prices.

The benchmark Brent crude stayed above $110 per barrel after nearing $112 on Tuesday, its highest in five months, as traders weighed Red Sea shipping risks and threats to Saudi oil infrastructure.

India imports nearly 90% of its crude and is especially exposed to supply shocks. Persistently high energy prices threaten to push up inflation, weigh on the rupee and strain government finances.

The country’s September consumer inflation accelerated to 5.54% and is on track to cross the upper end of the central bank’s tolerance band in October, according to economists.

The Reserve Bank of India raised rates and changed stance earlier this month, and traders will scan the minutes of this meeting due after market hours on Wednesday, for clues on the central bank’s assessment of oil-driven inflation.

The India sovereign yield curve has surged, driven by the RBI’s hike and its unexpected change in stance to ‘calibrated tightening’, high inflation data, liquidity tightness from recent FX measures, and elevated oil prices, said Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank.

“Going ahead, we expect the 10-year bond yield to trade in the 7.25%-7.50% range in the near term.”

Swap markets are pricing in about 100 basis points of rate hikes over the next 12 months.

Rates

India’s overnight indexed swap (OIS) rates jumped in line with oil prices and Treasury yields.

The 1-year OIS ended 6 bps higher at 6.59%, while the 2-year rate rose 5 bps to 6.66% and the liquid 5-year rate settled at 6.84%.