India bonds face twin drag from rising oil, US yields

Government bonds in India lost ground for a second consecutive session on Thursday, according to Business Recorder, as US Treasury yields rose and Brent crude held above $100 per barrel. Traders said the moves raised fears of higher inflation. Brent climbed further overnight after tankers near the Strait of Hormuz were struck by the US and Iran, deepening concern over supply.

India, the third-largest oil importer and consumer in the world, could face a larger import bill, pressure on public finances, higher inflation and weaker financial market sentiment if crude stays elevated. The 10-year US Treasury yield touched 6.84% on Wednesday, its highest level since 2023, as oil prices rose and fiscal worries grew.

Domestic bonds were cushioned by a banking liquidity surplus of 10.49 trillion rupees ($110.30 billion) as of Wednesday, which limited selling. The benchmark 6.94% 2036 bond yield stood at 6.9665% at 10:20 a.m. IST, 1 basis point above its previous close. The rupee slipped for a fifth consecutive day to 95.16 per dollar, while Axis Capital said a 25 basis-point CRR increase to 3.25% cannot be ruled out.