Indian Bonds Under Pressure As Oil Surge And US Yields Climb

Indian government bonds declined on 23 March, Monday, pushing yields higher as global cues turned adverse.

The benchmark 6.48% 2035 yield rose to 6.8261% in early trade, up from 6.7369% at the previous close. The move reflects selling pressure, as bond prices and yields move in opposite directions.

The pressure came from a sharp rise in crude oil prices and a steady climb in U.S. Treasury yields. Brent crude stayed close to $113 per barrel amid rising tensions in the Middle East.

At the same time, U.S. 10-year yields moved above 4.40%, while shorter-term yields also edged higher, signalling continued inflation concerns.

The Indian rupee weakened further, touching a record low of 93.94 against the dollar. The combination of high oil prices and a stronger dollar has increased strain on domestic markets.

Why Is The Bond Market Under Pressure?

Several factors have affected sentiments of the Indian bond market, including:

• Higher crude prices raise inflation risks for India, which depends heavily on imports.

• Rising US yields make global investors shift funds toward safer, higher-return assets.

• Heavy borrowing plans are adding supply pressure, with states set to raise ₹574 billion this week.

• There is still limited clarity on how actively the central bank will support the bond market.

The swap rates have also increased with the five-year overnight index swap (OIS) rate going up to 6.52%, showing that the market is anticipating rate conditions to become more restrictive.

Is The Rupee Falling Making Things Worse?

Yes, the currency move is adding to concerns.

If the rupee weakens, then imports, particularly crude oil, will become more expensive. Thereby, it can lead to higher inflation and a widening of the current account deficit.

Besides, it lessens the attractiveness of Indian assets to foreign investors who might also decide to withdraw their investments.

All of this feeds back into the bond market, keeping yields elevated.

Also Read - Investors Rush Towards Money Market Funds Amid Rising Oil Prices

What Can Investors Expect Next?

The direction from here will depend on a few key triggers. Oil prices will remain the biggest variable.

Any further rise could keep pressure on yields; US bond yields can change the way foreign investors choose. Demands would possibly not be strong enough to absorb the supply of bonds if the states increase the supply.

The Reserve Bank of India (RBI), if it sends even a small hint of liquidity or support, will help in stabilising the overall situation.

In the short term, the market may continue to react to global events, and there can be very little scope for yields to come down unless external factors change for the better.

Sources:

ET

The Hindu