Indian Bond Yields Rise as Oil Prices Surge 25% Amid Ongoing Middle East Conflict

Global Market Concerns Weigh on Indian Government Bonds

Indian government bonds saw a decline in value as the escalating conflict in the Middle East drove Brent crude futures up 25% to $115.92 per barrel, a significant concern for the world's third-largest crude importer.

The benchmark 6.48% 2035 bond yield surged 6 basis points as of 11:40 am to 6.7503%, its largest single-day rise since the government announced a larger-than-expected borrowing plan at the start of February. The yield increase is expected to impact the market, particularly with the weakening rupee.

The current January retail inflation rate stands at 2.75%, and analysts predict that sustained high crude prices could lead to an increase of 50-60 bps in inflation. The U.S.-Israeli conflict with Iran has entered its 10th day, with Iraq and Kuwait cutting oil output, and the United Arab Emirates and Saudi Arabia potentially facing production reductions due to storage capacity constraints.

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To temper the selloff in bonds, market traders are counting on the Reserve Bank of India to continue secondary market debt purchases and planned open market operations. Later in the day, the central bank will conduct an open market purchase worth 500 billion rupees ($5.42 billion), including multiple liquid papers.

RATES

• One-year OIS: +13.25 bps to 5.74%
• Two-year OIS: +18.5 basis points to 5.96%
• Five-year OIS: +15.5 bps to 6.37%