Indian government bonds ended little changed on Tuesday as investors braced for the Reserve Bank of India's policy decision on Wednesday, according to The Economic Times. The benchmark 6.48% 2035 bond yield ended flat at 7.0458%, down 4 basis points from the day's high, as reported by Reuters. Bonds have been whipsawed by the Iran war, now in its sixth week, as India imports a bulk of its crude and gas needs and faces an energy shock. Iran showed no sign of agreeing to U.S. President Donald Trump's demand that it open the Strait of Hormuz by the end of Tuesday, creating ongoing market pressures. Any action on rates is highly unlikely, analysts say, with focus expected on economic projections and measures to mitigate currency pressures.
The Iran war on its 37th day has intensified market pressures through repeated strikes on critical energy infrastructure. Iran's parliamentary speaker hinted at blocking the Bab el-Mandeb Strait, a key corridor for global oil, LNG and grain shipments, raising fears of further escalation of the energy crisis. The Bushehr nuclear complex has been hit for the fourth time in roughly a month, effectively blocking restoration attempts and creating what analysts describe as the worst-ever supply disruption becoming reality. This ongoing conflict is contributing to inflation concerns and creating additional pressure on bond markets, with Brent oil prices rising due to the U.S. - Israel war against Iran continuing to disrupt global energy supply.
Despite the bond market pressures, the rupee has strengthened due to RBI liquidity measures and tighter forex rules, according to CNBC TV18. This currency support provides some stability amid the broader market volatility and helps offset some of the negative effects from rising yields and global uncertainties. The U.S. Dollar Index remained at 100.23, while the U.S. Dollar was unchanged at 159.635 Japanese yen, as reported by multiple sources. The currency strength comes as investors seek safe-haven assets amid the escalating geopolitical tensions.
Investors are now closely watching the RBI policy decision on Wednesday, where the central bank is expected to hold rates but may act to stabilise yields and currency, as reported by CNBC TV18. The policy decision comes at a critical time when markets are seeking guidance on monetary policy direction and potential measures to address current economic pressures. Recent developments show that the U.S. Dollar Index fell by 0.1% to 100.15, while the U.S. Dollar was unchanged at 159.555 Japanese yen, as reported by multiple sources. The central bank's actions will be crucial in managing the impact of the Iran war supply disruption on domestic markets.
India sees no immediate risks to its fiscal deficit target for the financial year that began on April 1, and will continue to prioritise capital spending, two government sources said, according to The Economic Times. HDFC Bank anticipates the RBI to revise up its inflation forecast in the upcoming policy meeting by close to 50bps at least compared to earlier estimates, as reported by Reuters. Bonds and overnight index swaps had aggressively priced in rate hikes due to the escalating Middle East war, but some of these bets are being reversed, traders said. The benchmark Brent crude has jumped over 50% since the war began, creating additional inflationary pressures that the central bank will need to address in its policy statement.
