Indian government bonds declined for a third consecutive session on Friday as oil prices climbed amid no resolution to the U.S.-Iran conflict, while traders braced for fresh supply from the weekly auction. India's benchmark 6.48% 2035 bond yield was at 6.9534% as of 10:00 a.m. IST on Monday, after ending at 6.9365% on Friday. The yield rose 4 basis points this week, after declining by an aggregate of 23 bps in the last two weeks. The decline reflects growing concerns about the impact of elevated oil prices on India's fiscal outlook and economic growth prospects. New Delhi will raise ₹320 billion ($3.40 billion) through a bond sale later in the day, including the liquid 30-year paper, adding to market supply pressures.
Hopes for a US-Iran diplomatic breakthrough faded following Washington's abrupt cancellation of planned talks, adding to geopolitical uncertainty that is impacting import-sensitive markets like India. U.S. President Donald Trump said Iran could still reach out if it wanted to negotiate an end to the conflict, while reiterating that Tehran would never be allowed to possess nuclear weapons. Any optimism around renewed peace efforts weakened after Trump scrapped a planned Islamabad visit by his envoys at the last minute. Iranian Foreign Minister Abbas Araqchi meanwhile travelled between Pakistan and Oman on Sunday as diplomatic efforts continued via intermediaries. The escalation comes as Iran has effectively shut the Strait of Hormuz - a critical chokepoint for nearly a fifth of global oil supply - while Washington has tightened pressure by blockading Iranian ports.
Oil prices rose further in Asian trade on Monday after U.S. President Donald Trump said Iran could still reach out if it wanted to negotiate an end to the conflict, while reiterating that Tehran would never be allowed to possess nuclear weapons. Benchmark Brent crude contract was around $107 per barrel, surging 50% since the U.S.-Iran war began on February 28. Elevated oil prices are negative for India, which depends on imports for nearly 90% of its crude requirements, as it could raise the nation's import bill as well as impact inflation and fiscal deficit. The Strait of Hormuz blockage is creating supply-side pressures that make oil costlier and weigh on India's import bill.
The benchmark Nifty 50 index dropped 0.9%, pegging back regional stocks as oil prices rose above $100 a barrel. According to The Economic Times, traders and analysts say the rupee's future trajectory will depend on how high oil prices remain and for how long. An extended energy shock is likely to keep the rupee under strain, and it 'wouldn't be a surprise' if the central bank takes additional measures to support the currency, a trader at a Singapore-based hedge fund said. The India Volatility Index ended nearly 4% higher at 18.3000 as nervousness among investors rose considerably.
India's overnight index swap rates were mostly steady in thin early trade as traders awaited strong cues on interest rates. The one-year OIS rate stood at 5.88%, while the two-year swap rate was at 6.11%, with the liquid five-year OIS rate at 6.49%. Swap rates rose 7-9 bps last week. Higher oil prices are clearly negative for Indian debt, and with supply ahead, the market has little reason to turn optimistic for now, said a trader at a private bank. India relies heavily on oil imports, making elevated prices a concern, with these purchases accounting for roughly one-fourth of the country's total import bill.
