India bonds fall as oil spike fuels rate-hike fears

Indian government bonds reversed early gains and ended lower on October 19 as a jump in crude oil prices strengthened expectations of a domestic interest-rate increase, Economic Times Markets reported. The benchmark 6.94% 2036 bond yield closed at 7.3920%, up from 7.3789% in the previous session.

The reversal came at the start of a holiday-shortened trading week, with Indian debt markets due to remain closed on Tuesday. Earlier in the session, lower US Treasury yields had encouraged value buying, pushing the Indian benchmark yield down to 7.35%. Bond prices move in the opposite direction to yields.

The benchmark 10-year yield has now risen for nine consecutive weeks—a record streak, according to the report—with a cumulative increase of 62 basis points.

Oil raises inflation and rupee concerns

Brent crude was trading around $108 a barrel after touching $110 on Friday for the first time since May. Persistently high oil prices pose several risks for India's debt market: a larger trade and current-account deficit, additional pressure on the rupee and higher domestic inflation.

September consumer inflation accelerated to 5.54%. Economists cited in the report expected it to exceed 6%, the upper edge of the RBI's inflation tolerance band, in October. That remains a forecast, not an October inflation reading.

Puneet Pal, head of fixed income at PGIM India Mutual Fund, said the RBI's next policy action could be a 50-basis-point rate increase. He linked the timing—at the scheduled Monetary Policy Committee meeting or before it—to the rupee's trajectory, which he expected crude prices to influence. His assessment is a market forecast, not an announced RBI decision.

RBI measures and swap-market pricing

RBI Governor Sanjay Malhotra said last week that recent foreign-exchange measures were intended to restrain currency speculation. He also said that although the central bank does not ordinarily use monetary policy to protect financial stability, the two issues cannot be treated as entirely separate.

Overnight indexed swap rates recovered from their intraday lows to finish little changed. The one-year rate ended at 6.53%, the two-year rate at 6.60% and the five-year rate at 6.78%.