Indian government bonds delivered their best week in six-and-a-half years, with the benchmark 6.48% 2035 bond yield falling 22 basis points to settle at 6.9130% on Friday, marking the biggest weekly decline since October 2019. As per The Economic Times, this remarkable performance was driven by a fragile truce between U.S. and Iran that cooled oil prices and provided relief from geopolitical tensions. The benchmark 6.48% 2035 bond yield had posted its sharpest one-day decline in nearly four years on Wednesday, demonstrating the magnitude of the recent rally. The rupee closed out a second consecutive week of gains against the dollar while shares in Mumbai posted their biggest weekly gain in over five years, according to The Economic Times. The market also drew comfort from a neutral central bank policy this week, as many traders had anticipated a more hawkish commentary.
Brent crude has remained under $100 a barrel since the ceasefire held for a second day, though it showed some upswing as the fragile truce showed signs of strain ahead of talks between U.S. and Iran. Following the ceasefire, Brent crude oil prices crashed 15% to $92.78 per barrel, helping improve bond trader sentiment in India because lower rates reduce the risk of imported inflation and reduce pressure on the local currency amid less demand for dollars. The conflict, which had dragged for more than a month and sent Brent surging more than 50%, has now been calmed with the ceasefire agreement. India, which imports 90% of its oil supplies, is among the most vulnerable to prolonged supply disruptions, making the current relief particularly significant for the economy. The one-year OIS rate fell 54.2 basis points this week to 5.83%, while the two-year rate eased 57.5 basis points to 5.9950% and the five-year fell 55.5 basis points to 6.31%, as reported by The Economic Times.
The Reserve Bank of India kept its policy rate and policy stance unchanged on Wednesday, with the six-member Monetary Policy Committee voting unanimously to maintain the status quo, while warning about heightened uncertainty after the West Asia conflict drove crude prices sharply higher, weakened the rupee and disrupted trade flows. As per The Economic Times, the policy was described as neutral to mildly dovish, with the RBI adopting a wait-and-watch approach. Governor Sanjay Malhotra said the central bank would continue to be proactive and pre-emptive in liquidity management while ensuring sufficient liquidity to meet the productive requirements of the economy. According to Puneet Pal, fixed income head at PGIM India Asset Management, "The RBI governor's emphasis on keeping liquidity adequate and the forecast of low core inflation indicated that monetary tightening is not on the horizon." HSBC expects the RBI to keep rates unchanged in 2026, activating the flexible inflation targeting band of 2%-6%, even if inflation comes in higher than the central bank's 4% target. Following the policy announcement, yields in the corporate bond market eased by 10–15 basis points across tenors, with the CP-CD market also witnessing easing across the curve by around 20 basis points.
India's overnight index swap rates showed a sharp receiving this week as traders pared hawkish bets after the ceasefire held for a second day, with the one-year OIS rate falling 54.2 basis points this week to 5.83%, the two-year rate easing 57.5 basis points to 5.9950% and the five-year falling 55.5 basis points to 6.31%, as reported by The Economic Times. The most liquid five-year swap rate climbed 5.5 basis points to 6.3850%. Swap markets are now pricing in two rate hikes this financial year, down from more than four hikes until last week. The Hindu BusinessLine reports that India's overnight index swap rates may rise, tracking bond yields and after aggressive receiving in the previous session. RBI Governor Sanjay Malhotra cautioned against reading too much into the swap rate movements, saying the market is "very thin." However, according to Suyash Choudhary, CIO-Fixed Income, Bandhan AMC, the government bond curve has started steepening again, reflecting relief on any sort of policy rate hike expectations. India's banking system liquidity surplus stood at ₹4.57 trillion ($49.32 billion), the highest in four years, as reported by The Economic Times.
Amid ongoing geopolitical uncertainties and the RBI's data-dependent approach to monetary policy, experts recommend a barbell investment strategy — allocating predominantly to short-term and long-term bonds while avoiding medium-term maturities. As per Priyashis Das, CEO of Altifi by Northern Arc, "Investing in short-term bonds helps to reduce overall interest rate risk along with providing liquidity, while the long-term bonds provide higher yields and potential benefit if interest rates fall." Puneet Pal, Head of Fixed Income at PGIM India Asset Management, expects the 10-year bond yield to trade within a range of 6.75% to 7.10% over the next couple of months and recommends short-duration money market funds with maturities of up to one year. The central bank's monetary policy report projects 10-year bond yield at 7% for FY27 and 6.9% in FY28, against 6.8% in FY26, as reported by The Economic Times. The current market uncertainty stems from doubts the two-week U.S.-Iran ceasefire will hold and as the crucial Strait of Hormuz remains restricted, according to The Hindu BusinessLine. The strait connects supply from the key Middle East producing region, including Iraq, Saudi Arabia, Kuwait and Qatar, to global markets and typically carries about 20% of oil supply. India's banking system liquidity surplus stood at ₹4.57 trillion ($49.32 billion), the highest in four years, as reported by The Economic Times.
