Indian government bonds fell on Friday ahead of a heavy debt sale, with India's benchmark 6.48% 2035 bond yield at 6.9056% as of 11:45 a.m. IST, up from 6.8884% on Thursday. According to The Hindu BusinessLine, New Delhi will sell ₹320 billion ($3.44 billion) worth of 5-year and 40-year notes later in the day. A private bank trader noted that "demand and risk appetite in the weekly auction will decide the direction of yields." The selloff reflected concerns that elevated crude prices could complicate India's inflation and growth outlook, as traders noted a reversal after Friday's bond purchases.
S&P Global Ratings has warned that supply disruptions of food and fuel could have a material weakening of credit quality for some companies despite India's sovereign rating remaining stable. According to The Economic Times, the rating agency expects earnings of top 100 companies to drop by 15% to 20% in fiscal 2027 if energy costs remain elevated, which will increase the debt to EBITDA ratio for large companies. Anshuman Bharati, associate director, corporate rating at S&P Global Ratings, noted that "the leverage for the large companies could increase by 0.5 times to 1 times of EBITDA. Supply disruptions could cause a material weakening in credit quality though the impact of just higher energy prices in more manageable." The agency has listed refining and airlines as two most vulnerable sectors with cement, metals and steel also facing risks due to their dependence on energy imports.
Benchmark Brent crude futures hovered near $100 a barrel as the Strait of Hormuz continued to be shuttered, choking off roughly one-fifth of the world's oil supply. According to The Hindu BusinessLine, Trump expressed confidence that an agreement could soon be reached to end the war following a 10-day truce that went into effect between Lebanon and Israel. However, the conflict continues to disrupt traffic through the crucial passage for crude oil shipments. Elevated oil prices remain unfavorable for import-dependent India, which depends significantly on imports to satisfy its energy requirements. The White House also expressed optimism about securing a deal to end the conflict, while warning economic pressure on Tehran would intensify if it continues to resist.
The rupee strengthened 0.6% to 92.66 per US dollar, supporting Indian bonds by easing inflation risks and reducing pressure on the central bank to keep rates elevated. As reported by The Hindu BusinessLine, rising US Treasury yields also weighed on Indian bonds, with the US 10-year yield edging higher for a third day at 4.3193% during Asian hours. The stronger currency improves the appeal of debt for foreign investors. Separately, India's central bank has urged state-run oil refiners to curb spot dollar purchases and tap a special credit line for their foreign exchange needs, according to Reuters. Foreign investors have net sold over $19 billion of local stocks and bonds since the Iran war began in late February amid worries over how elevated prices and supply disruptions may threaten India's growth-inflation dynamics.
S&P Global expects India's banks to be on a risk-off mode as a result of the energy situation, with credit growth likely to weaken to 10% to 11% this fiscal from 12% to 13% last fiscal if the energy situation persists. According to The Economic Times, Geeta Chugh, managing director, financial institutions ratings at S&P, noted that "higher food and fuel prices will also impact disposable incomes if the situation is prolonged." The rating agency expects fiscal strains and a wider current account deficit as the government tries to keep inflation under check. YeeFarn Phua, director, sovereign & international public finance ratings at S&P, said excise duties make up about 10% of government revenues which could weaken if these cuts become structural in nature. The government has not allowed pump prices to increase, by reducing excise duties and passing on the burden to oil marketing companies, creating potential fiscal challenges.
