Indian Bond Yields Rise Towards 7% Amid Crude Oil Price Spike

Indian Government Bond Yields End April With Little Change Amid Global Volatility

The Reserve Bank of India's (RBI) dovish stance helped anchor sentiment in the Indian government bond market, despite external risks exerting upward pressure on yields. Indian government bond yields ended April largely unchanged from the previous month's closing levels, even as volatility picked up toward the end of the period amid a sharp rise in global crude oil prices and US Treasury yields.

The benchmark 6.48% 2035 government bond yield closed at 7.0148% on Thursday, slightly higher than 6.9928% in the previous session. Over the course of April, the yield moved in a broad range of 6.8648% to 7.1421%, compared to its March-end level of 7.0345%. The Indian rupee also hit a record low during the week.

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A key driver of the late-month bond selloff was the surge in crude oil prices. Brent crude climbed above $126 per barrel during the week, hitting levels last seen in March 2022 following the Russia-Ukraine war. Elevated oil prices are a significant concern for India, a net importer of energy, as they heighten risks to inflation and widen the fiscal deficit.

Crude oil prices stayed above $100 per barrel for most of the month, amid persistent geopolitical tensions. Although the United States initially announced a two-week ceasefire with Iran on April 7 — later extended indefinitely — uncertainty continued to weigh on energy markets. Adding to concerns, Iran has largely shut the Strait of Hormuz, a critical chokepoint that carries roughly one-fifth of global energy supplies.

Global bond markets also faced pressure, with the 10-year US Treasury yield rising to a five-week high during the month. This followed the US Federal Reserve's most divided rate decision since 1992, which dampened expectations of near-term rate cuts as rising energy prices heightened inflation concerns.

On the domestic front, the RBI maintained a status quo on policy rates and stance earlier in April, while reiterating its commitment to ensuring adequate liquidity in the banking system. This helped ease fears of an imminent rate-hiking cycle and provided some support to the bond market.

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India's overnight index swap (OIS) rates rose sharply in the latter half of April after declining earlier, though they still ended the month lower overall, reflecting the central bank's accommodative signals. The one-year OIS rate ended at 5.9950%, while the two-year swap rate closed at 6.23%. The five-year OIS rate settled at 6.61%.

The RBI's accommodative stance and reduced long-end supply in recent government securities (G-sec) auctions contributed to a modest flattening of the yield curve. However, rising crude oil prices continue to exert upward pressure on yields globally, pushing bond markets under pressure.

Market participants remain cautious as elevated crude prices heighten risks to inflation and widen the fiscal deficit. The RBI may consider an earlier-than-expected rate hike, especially given the depreciation in the rupee. Investors may consider investing in short-duration corporate bonds in the one- to two-year segment as a strategy to mitigate risks.

India's 10-year benchmark yield has moved above 7%, while US Treasury yields have climbed past 4.4%. The direction of bond yields will depend largely on the duration of the Hormuz blockade and the trajectory of crude prices.