Indian government bonds face major decline today: What's the reason?
What's the story
Indian government bonds witnessed a major sell-off today, owing to the relentless rise in oil prices. The spike has raised inflation concerns among investors and heightened fears of potential rate hikes. The benchmark bond yield hit its highest since March 9, 2023. The 6.94% 2036 bond yield was at 7.4352%, after closing at 7.3920% on Monday. To note, the Indian debt market was closed yesterday.
Market response
Oil prices continue to affect Asian markets
The benchmark Brent crude oil price nearly hit $112 per barrel on Tuesday, its highest in five months.
The high prices continued to affect the Asian markets as traders assessed shipping risks in the Red Sea and threats to Saudi oil infrastructure.
A primary dealer trader said, "Oil is driving the market right now, and it is difficult to see any large conviction-led buying till the picture becomes clearer."
Economic vulnerability
India imports nearly 90% of its crude oil
India imports nearly 90% of its crude oil, making it particularly vulnerable to supply shocks.
Persistently high energy prices could lead to increased inflation, pressure on the rupee, and strain government finances.
According to economists, India's consumer inflation rate for September rose to 5.54% and is likely to breach the upper limit of the central bank's tolerance band in October.
Policy adjustments
Traders are now looking at the minutes of the meeting
In light of the rising inflation, the Reserve Bank of India (RBI) hiked its key policy rate and changed its stance to "calibrated tightening" at its monetary policy meeting earlier this month.
Traders are now looking at the minutes of that meeting, due after market hours today, for clues about RBI's view on oil-driven inflation and potential rate hikes.
Swap markets are pricing in about 100 basis points of rate hikes over the next 12 months.