India bonds hit 12-week low as rupee strengthens on US-Iran peace deal

Indian government bonds rallied early Monday, sending the 10-year benchmark yield to a 12-week low after a long-awaited U.S.-Iran agreement knocked oil back toward levels last seen near the war's onset. Brent crude tumbled 8% to about $83 a barrel, almost 8% lower than levels before news of the agreement emerged, after Washington and Tehran clinched a preliminary deal to end the war and reopen the Strait of Hormuz. The yield on the benchmark 6.94% 2036 note dropped 4 basis points to about 6.86% on Monday, tracking declines in US Treasury yields and lower oil prices. The yield is now 20 basis points above pre-war levels, as oil prices have whipsawed since the conflict began on February 28, surging as high as $120 a barrel. The U.S. 10-year yield also fell nearly 6 basis points to 4.42% in Asian trade, with India's overnight index swap rates slipping further as traders received betting yields would soften over the medium term on foreign inflows.

Oil prices have shown significant volatility with Brent crude futures rising 1.6% to $94.55 in Asian trade earlier this week, representing a 30% increase since the war began on February 28. The conflict has effectively choked the Strait of Hormuz, a key global oil conduit, pushing up energy prices and straining India's external balances. However, the latest developments show WTI crude fell 3.9% to $87.67 after earlier deal optimism, while Brent had briefly touched $91.40 before the helicopter downing could push prices back sharply higher. According to ING commodities strategists, the situation remains highly volatile and demonstrates the difficulty Iran and the US face in working towards a sustainable ceasefire. Exxon and Chevron are now suggesting Brent could surge toward $150–$160 per barrel, as analysts and energy executives warn of a sharp price spike within weeks. Easing crude oil prices are a positive for India, the world's third-largest oil importer, as they help ease pressure on inflation, the rupee and the country's trade deficit.

The Indian rupee was trading near a five-week high at 94.5750 per dollar, as improved risk sentiment boosted the currency. Economists warn that India is increasingly counting the cost of the Iran war, which will keep mounting if the deadlock between the US and Iran remains unresolved and oil supply blockages continue. The central bank sees inflation averaging 5.1% in the financial year and growth slipping to 6.6% from 7.7% in the previous year. The government and the Reserve Bank of India have announced measures to boost foreign inflows to defend the rupee and strengthen India's external balances, with Kotak Mahindra Bank estimating the steps could draw about $75 billion in cumulative capital inflows and bring the balance-of-payments gap close to neutral, from a previously estimated $75 billion deficit. Foreign investors have poured more than $1.6 billion into Indian bonds over the past six sessions, with traders now watching for India's inclusion in the Bloomberg Global Aggregate Index, with Bloomberg Index Services expected to review the inclusion again this month.

The day's gains were limited due to fiscal slippage concerns after Bloomberg News reported that India may be willing to let the budget gap widen by as much as 50 bps to 4.8% of GDP for this fiscal year. Separately, India's retail inflation rose to 3.93% year-over-year in May from 3.48% in April, but was below the 4% projected in a Reuters poll. According to Alok Singh, head of treasury at CSB Bank, bonds are likely to consolidate and trade within a 10 basis-point range. Investors continued to assess the Reserve Bank of India's measures aimed at attracting foreign investment, supporting the rupee, and strengthening external balances. India's overnight index swap rates eased as traders received betting yields would soften over the medium term on foreign inflows, with the one-year swap falling 5 bps to 5.9175%, two-year rate dropping 6.5 bps to 6.06%, and five-year rate shedding 5.75 bps to 6.29%. As per Dhawal Dalal, President and CIO - Fixed Income, Edelweiss MF, yields are expected to ease further towards the 6.75–6.80% range in the near term, supported by improved sentiment and a pickup in FPI inflows into government bonds.

Focus is on fresh debt supply, with New Delhi set to raise ₹32,000 crore ($3.34 billion) through a bond sale via 5-year and 40-year bonds. Demand for the five-year 6.36% 2031 bond is expected to stay strong, with its yield down nearly 30 basis points since the Reserve Bank of India's policy decision on June 5. Foreign investors have also lapped up more than $500 million of this paper. A private-bank trader noted that the 10-year yield could head toward 6.70% in the near term, as markets remain upbeat on foreign inflows, though volatility may persist due to oil-price swings. State Bank of India and Bank of Baroda are set to become the first users of the RBI's subsidised hedging window for overseas borrowings, with plans to raise about $1 billion through five-year dollar bonds. India is the world's third-largest oil importer, making its economy and assets highly vulnerable to price swings. Since the war in West Asia started on 28 February, the local unit had depreciated by 5% after declining by 11% in FY26, according to data by the National Securities Depository Ltd.