Indian government bonds experienced a decline on Wednesday as oil prices remained elevated, with investors expressing caution about ongoing Middle East tensions. According to reports from The Economic Times, India's benchmark 6.48% 2035 bond yield was at 6.9062% at 11:30 a.m. IST, compared to Tuesday's close of 6.8894%. The 10-year yield has stayed within a tight band since the ceasefire began on April 8, as reported by market analysts.
President Donald Trump announced an indefinite extension of the ceasefire with Iran to allow more time for peace talks, though it was not clear on Wednesday whether Iran or Israel would agree to the terms. As reported by The Economic Times, Trump also stated that the US Navy would continue blocking Iran's maritime trade, a move that Tehran considers an act of war. With the two-week truce in its final hours, the US president said he would push the deadline back indefinitely following a request from mediator Pakistan and stressing the need to give Tehran's "fractured" leadership time to form a proposal. Brent crude hovered near $98 a barrel, maintaining elevated levels that continue to impact bond market sentiment.
Traders remain cautious as crude has held above $90, with talks showing little progress and the Strait of Hormuz remaining shut. According to the Reserve Bank of India, a 10% increase in oil prices above $85 per barrel could push up India's inflation by 50 basis points and pare growth by 15 basis points. Market analysts note that upside is currently capped around 6.93%-6.94% (on the 10-year yield) if the war doesn't break out afresh. Oil prices fell along with stocks Wednesday as investors assess the chances of US-Iran peace talks following Trump's extended truce decision.
India's overnight index swap rates surged as higher oil prices dampened sentiment. As reported by The Economic Times, the one-year OIS rate was up 1.5 bps at 5.80%, while the two-year swap rate rose 2.5 bps to 6.01%. The liquid five-year OIS rate was higher by 4.75 bps at 6.4050%, reflecting the broader market uncertainty surrounding geopolitical tensions.
According to Citi analysis reported by The Economic Times, expects a 20-bp risk to the fiscal deficit target for the year if the strait reopens by May, rising to about 50 bps if it is delayed by two more months. The central bank expects GDP growth to fall to 6.9% in 2026-27 from an expected 7.6% in the year ended March 31, 2026, highlighting the potential economic impact of prolonged geopolitical tensions on India's growth trajectory.
