India bonds to come under selling pressure at start of new week as oil spike continues

MUMBAI: Indian government bonds could open another week with declines as oil prices stayed elevated, stoking concerns over inflation that may push the central bank into a hawkish posture.

The 6.94% 2036 bond yield may trade between 7.45% and 7.50%, according to a trader at a primary dealership, after closing at 7.4740% in the previous session.

The benchmark 10-year bond yield rose 9 basis points through Friday, adding to a 62 bps increase in the previous nine weeks, a period that marks the longest continuous weekly run of rising yields since 1998.

“We could see some selling pressure,” the trader said, while qualifying that “since oil has come down from highs today, the dreaded figure of 7.50% may still be a little away.”

Oil prices ended high on Friday, with the benchmark Brent crude contract rising above $117 per barrel, its highest level in almost six months, after Houthi attacks in Saudi Arabia stoked concerns over further disruption to energy supplies.

The contract gained 6.2% last week, its biggest rise since the week ended September 11, but eased slightly in Asian trading hours on Monday.

India is particularly vulnerable to elevated energy prices as it imports nearly 90% of its oil needs.

Consistently elevated prices risk feeding into the nation’s inflation trajectory, impacting the rupee and government finances.

The Reserve Bank of India raised the repo rate and shifted its stance earlier this month, hinting at more hikes, while markets are now pricing in a little over 100 bps of hikes in the next 12 months, according to overnight indexed swaps.

The US Federal Reserve’s monetary policy decision is due on Wednesday evening and will be in focus, with markets looking beyond what’s expected to be a pause for clues on whether further rate hikes remain on the table this year.