Indian government bonds surged on Wednesday, as oil prices plunged after the U.S. agreed
to a two-week Iran ceasefire, calming fears of an immediate
escalation in the war, and resulting in bullish momentum before
the central bank policy.
The benchmark 6.48% 2035 bond yield was at
6.9177% as of 9:40 a.m. IST, after ending at 7.0458% on Tuesday.
The Reserve Bank of India’s monetary policy decision is due at
10:00 a.m. IST.
“RBI’s words will resonate more than their actions. Amid a
rapid shift in financial market narratives following the Middle
East crisis, investors are likely to focus on the central bank’s
guidance. We expect policymakers to emphasize their capacity to
contain domestic risks while refraining from signalling a
clearly hawkish policy trajectory,” DBS Bank said in a note.
Benchmark Brent crude slipped over 13% and was around $95
per barrel after U.S. President Donald Trump said he had agreed
to a two-week ceasefire with Iran, contingent on the immediate
and safe reopening of the Strait of Hormuz.
Trump’s turnaround came shortly before a deadline he had set
for Iran to reopen the vital waterway, which accounts for
roughly 20% of global oil flows, or face widespread attacks on
its civilian infrastructure.
Elevated oil prices are detrimental for India, the world’s
third-largest crude importer, as they threaten to worsen
domestic inflation and widen the current account deficit.
The constant rise in oil prices over the last few weeks had
led to a sharp jump in bond yields and swap rates, with swaps
pricing as much as 100-125 bps of rate hikes in this financial
year.
RATES
India’s overnight index swap rates collapsed tracking lower
oil and Treasury yields.
The one-year OIS rate plunged to 5.93%,
while the two-year rate fell to 6.07%. The
most liquid five-year swap rate dropped 26 bps
to 6.40%.