Indian government bonds rose on Wednesday as Brent crude prices eased more than 5% since Monday's close, hovering around $108 per barrel in Asian hours. The benchmark 6.48% 2035 bond yield fell to 6.9821% as of 10:30 a.m. IST, down from 7.0184% on Tuesday. According to The Economic Times, the decline in crude prices lifted investor sentiment and eased domestic inflation concerns. A trader with a primary dealership noted that the fall in crude has eased some pressure in the bond market, though investors remain cautious until there is more clarity on a potential U.S.-Iran peace deal. On Tuesday, U.S. President Donald Trump unexpectedly said he would briefly pause an operation to help escort ships through the Strait of Hormuz, citing progress toward a comprehensive agreement with Iran, without giving details.
The West Asia war, now in its third month with no resolution in sight, has fundamentally changed market dynamics. As reported by Mint, Brent crude has surged nearly 60% since the US and Israel launched attacks on Iran in late February, with a fresh flare-up in the Strait of Hormuz on 5 May pushing prices to around $114 per barrel. India's 10-year benchmark yield rose to 7.04% the same day, while the rupee fell to ₹95.31 against the dollar, near record lows. According to a 2025 RBI paper, a 10% rise in crude oil prices is estimated to push the Consumer Price Index (CPI) up by 20 basis points. However, recent developments show elevated energy prices are detrimental for India - the world's third-largest oil importer. Despite a ceasefire, the strait, which typically carries about one-fifth of the world's oil and natural gas supply, has been largely shut since the war began on February 28.
The crude oil surge creates a two-sided challenge for bond markets. According to Mint reports, higher inflation reduces the RBI's room to cut rates, while a wider current account deficit pressures the fiscal deficit as the government may need to keep borrowing higher. This also puts upward pressure on yields due to higher supply of government bonds. With elections now behind India, the risk of fuel price hikes has risen significantly, as the government passes on higher crude costs to consumers, leading to inflation, or absorbs the hit, widening the fiscal deficit. The one-year OIS rate was at 5.98%, while the two-year swap rate was at 6.21%, with the five-year rate at 6.61%, showing the impact of recent market volatility.
Market experts are advising caution in the current environment. Puneet Pal, head of fixed income at PGIM India Mutual Fund, stated that the geopolitical conflict with crude prices elevated above $100 creates uncertainty about how long this will persist, making it difficult to take a clear tactical view on long-duration gilt funds. Dhawal Dalal, chief investment officer – fixed income at Edelweiss Mutual Fund, points to compounding domestic headwinds including elevated government borrowing, reduced central bank support through bond purchases, and subdued foreign investor participation. He recommends deploying capital gradually in three to four tranches rather than committing a lump sum at current levels. As per The Economic Times, traders are awaiting a crucial debt sale on Friday when New Delhi plans to raise ₹340 billion ($3.58 billion) through the sale of a new 10-year paper, which would replace the existing benchmark. The market anticipates the cutoff yield to be around 2 basis points lower than the current benchmark.
Fund managers remain neutral on long-duration bonds with expectations that yields could still edge higher. According to Mint reports, Dalal notes it is not very clear what will trigger a meaningful decline in yields in the near term, suggesting yields may remain elevated and range-bound rather than seeing a sharp decline. The market anticipates the cutoff yield to be around 2 basis points lower than the current benchmark for the upcoming debt sale. The consensus among experts is that investors should wait for fresh triggers to emerge before considering tactical investments in long-duration gilt funds, with traders remaining cautious until there is more clarity on potential U.S.-Iran peace developments.
