Indian government bonds edged higher early on Friday, tracking U.S. Treasuries as oil prices fell after the U.S. and Iran extended their ceasefire, though gains were capped by an upcoming debt auction. According to The Economic Times, the benchmark 6.48% 2035 bond yield stood at 6.9905% at 10:55 a.m. IST, versus Wednesday's close of 6.9960%. The 10-year yield is headed for its biggest weekly decline in eight weeks, with traders awaiting the Reserve Bank of India's policy decision. Benchmark Brent Crude futures have eased 10% so far this week and was last at $92.69 per dollar, providing relief to importer India as cheaper oil can ease inflation and reduce pressure on the rupee.
The Government of India has announced the sale of two dated securities for a notified amount of ₹28,000 crore, adding to market pressure as oil prices surge toward critical thresholds. The auction includes ₹17,000 crore worth of 6.68% GS 2040 bonds and ₹11,000 crore worth of 7.43% GS 2076 bonds, with both securities scheduled for auction on May 29, 2026 using multiple price method. According to Business Standard, both competitive and non-competitive bids must be submitted electronically through the Reserve Bank of India Core Banking Solution (e-Kuber system). The government retains the option to retain additional subscription up to ₹2,000 crore against each security, providing flexibility in market conditions. Domestically, traders held off on directional bets ahead of New Delhi's ₹280 billion rupee debt sale later in the day.
The 10-year US treasury yield was at 4.44%, down 1.4 bps on the day and over 13 bps this week, providing additional support to Indian bond markets. As per The Economic Times, this decline in U.S. yields helped ease inflation concerns globally, with traders mirroring the positive sentiment in U.S. Treasuries. The one-year swap was down 2 bps at 6.08%, while the two-year rate dropped 3 bps to 6.26% and the five-year rate fell 3 bps to 6.5825%. A trader at a primary dealership noted that "We expect the RBI to hold rates at the upcoming policy meeting, and fears of an immediate hike have eased. If crude stays around current levels, bonds could rally another 5-6 bps."
The single most important price level to monitor is $110 per barrel for Brent crude, according to bond market participants. As per IFA Global projections, if Brent remains below this threshold, the RBI's combination of currency interventions and bond purchase operations is expected to keep India's 10-year government bond yield within a range of approximately 7.02% to 7.15%. However, a sustained breach above $110 would likely shift the policy calculus dramatically, potentially forcing the RBI to consider raising interest rates at its June 5, 2026 policy meeting. Standard Chartered Bank and MUFG have both flagged that renewed imported inflation at that level could force the RBI to consider emergency rate hikes, which would push yields materially higher while simultaneously increasing the risk of economic contraction.
Economists at Standard Chartered, ANZ, MUFG, and OCBC now expect the RBI to start hiking rates as early as June 5, while expecting another similar move in August, according to The Economic Times. The one-year swap was down 2 bps at 6.08%, while the two-year rate dropped 3 bps to 6.26% and the five-year rate fell 3 bps to 6.5825%. Elevated oil prices continue to impact India's inflation, current account deficit, and the government's fiscal math, while adding pressure on the central bank to hike interest rates. This comes after U.S. President Donald Trump said on Saturday that Washington and Iran had largely negotiated a memorandum of understanding for a peace deal that would reopen the Strait of Hormuz, though analysts caution that even if a deal is finalised, a full recovery in energy flows is unlikely to be immediate.
