US-Iran Tensions Fuel Slight Increase in Bond Yields

India's Sovereign Bond Yields Climb Amid Global Market Volatility

India's sovereign bond yields rose three basis points to 7.04 percent on May 5, as the rupee plunged 22 paise to a record low of 95.31 against the dollar. The sell-off in debt and currency markets was triggered by a fresh US-Iran flare-up in the Strait of Hormuz, which pushed Brent prices even higher.

The benchmark 10-year bond prices declined as yield rose, while Brent crude prices jumped overnight to trade near $114 a barrel after Iran attacked multiple ships in the Strait of Hormuz and ignited a fire at a UAE oil port. The US had said that it would ensure passage through the Strait of Hormuz, putting an already fragile ceasefire deal between the two countries in jeopardy.

High Brent crude prices are detrimental to India's inflationary outlook and put upward pressure on domestic bond yields. Crude has zoomed around 60 percent after the US and Israel launched attacks on Iran on February 28. A sustained $10/bbl rise in crude typically adds about 35 bps to India's CPI, and also increases India's import bill by around $15 billion annually, assuming nearly 4.5–5.0 mbpd imports and normal pass-through.

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The Reserve Bank of India (RBI) is set to auction a new 10-year benchmark bond worth Rs 34,000 crore on May 8.

Market participants are closely watching the sale, which is likely to steer the direction of bond yields in coming weeks. The rupee opened 22 paise lower, testing record lows, on crude supply concerns. The rupee was trading at 95.31 against the dollar after closing at a record low of 95.09 in the previous session.

Rupee at Record Lows

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The rupee sank to an all-time low of 95.33 on April 30. When oil is rising fast, defending the rupee becomes an expensive exercise, with the Rs 95.30–Rs 95.50 range expected to act as a strong resistance in the near term.