Indian 10-year bond yields see an uptick: What's the reason?
What's the story
Indian government bonds witnessed a marginal uptick today, with yields easing slightly. The benchmark 6.48% 2035 bond yield fell to 6.8633%, down from its previous close of 6.8681% on Tuesday. This comes after crude oil prices fell below the $100-per-barrel mark, amid reports of a potential US-Iran ceasefire plan. The yield on the US 10-year Treasury note also declined by five basis points to settle at 4.338%.
Response
Crude oil prices fall sharply
The rise in bond prices is largely attributed to the sharp fall in crude oil prices, which has eased inflationary concerns. The benchmark Brent crude contract fell nearly 5% to $99.60 per barrel after hitting an intraday low of $97.15. This decline is mainly due to recent positive developments in the US-Iran war, with reports suggesting that Washington has proposed a ceasefire with Iran for negotiations aimed at ending the Middle East conflict.
Supply disruption
India is affected by high crude oil prices
The ongoing US-Iran conflict has disrupted oil and LNG shipments through the Strait of Hormuz, a key transit route that usually accounts for nearly one-fifth of the world's oil and gas supply. High crude oil prices pose a major risk for India. They could worsen inflationary pressures and widen current account deficit. If Brent stays above $100 per barrel, India's current account deficit may exceed 2.5% of GDP, leading to a balance of payments deficit of around $85 billion.
Market outlook
Supply concerns cap gains
Despite the rise in bond prices, gains were capped by supply concerns. States are set to raise ₹39,540 crore through bond issuances on Friday, after a record ₹12.31 lakh crore raised in the current fiscal year. Madhavi Arora, Lead Economist at Emkay Global Financial Services, said that while the threshold for a conventional rate hike remains high amid a supply-side shock, it is yet to be seen if RBI will maintain abundant liquidity and sub-repo overnight rates.
Predictions
USD/INR exchange rate to move toward 96
Arora expects the USD/INR exchange rate to move toward 96, while the 10-year government bond yield could gradually rise to rougly 6.95%. She said, "With the rupee under persistent pressure despite continued foreign exchange intervention — primarily through forward contracts — the associated liquidity impact has been deferred." This is indicative of a cautious approach by RBI in response to market conditions.