Brent crude prices surged overnight following a confrontation involving U.S. and Iranian tankers near the Strait of Hormuz, exacerbating supply concerns. For India, the world's third-largest oil importer, this development threatens to inflate the import bill, strain government finances, and stoke inflationary pressures, potentially unsettling financial markets.
Indian government bonds weakened for a second consecutive day on Thursday, driven by rising U.S. Treasury yields and crude prices surpassing $100 per barrel. The rupee also depreciated for a fifth day against the dollar, as market participants focused on upcoming inflation data and the Federal Reserve's policy decision. Despite these pressures, the Indian bond market was somewhat shielded by a liquidity surplus, which stood at 10.49 trillion rupees ($110.30 billion) as of Wednesday.
The benchmark 6.94% 2036 bond yield rose slightly to 6.9665% by 10:20 a.m. IST, up 1 basis point from the previous close. Meanwhile, the rupee continued its downward trend, reaching 95.16 per dollar. The Reserve Bank of India (RBI) likely engaged in near-maturity dollar-rupee sell-buy swaps on Wednesday and may continue such measures to stabilize the market.
“If mandates permit, best to put money in papers that offer carry gains and are inelastic, and stay there for some time.”
Trader at an asset manager
Axis Capital noted the possibility of a 25 basis-point Cash Reserve Ratio (CRR) hike to 3.25%, as traders remain focused on inflation data from both the U.S. and India, alongside the U.S. Federal Reserve's upcoming policy decision. Overnight indexed swaps also surged, with the one-year rate at 6.0150%, the two-year at 6.2050%, and the five-year at 6.5075%, each gaining about 3 basis points.
"If mandates permit, best to put money in papers that offer carry gains and are inelastic, and stay there for some time," a trader at an asset manager advised.
Background
The ongoing geopolitical tensions and rising oil prices underscore the vulnerability of India's economy to external shocks, given its heavy reliance on oil imports. Historically, such scenarios have led to increased inflation and fiscal imbalances, impacting overall economic stability.
Looking ahead, market participants will closely monitor inflation data releases and the Federal Reserve's policy decisions, as these will be crucial in determining the trajectory of bond yields and currency movements in the coming weeks.
