Indian government bonds plunged after New Delhi’s excise duty cut on fuel clouded the
fiscal outlook, deepening market anxiety already stoked by the
war-driven oil price surge and heavy debt supply.
The benchmark 6.48% 2035 bond yield was at
6.9256% as of 10:40 a.m. IST, after closing at 6.8750% in the
previous session. Earlier in the day, the yield hit 6.9523%, its
highest since July 2024. Bond yields move inversely to prices.
“The bond market is caught in a storm of adverse triggers
that have pushed yields higher. This is definitely not the end
to the financial year that the regulator or market may have
wanted,” a trader with a private bank said.
New Delhi reduced the special excise duty on petrol to 3
rupees per litre from 13 rupees earlier. It also cut the duty on
diesel to zero from 10 rupees as fuel prices stay volatile, with
supplies choked by Middle East war.
Although India did not say how much the duty cuts would cost
the government, economists have estimated the impact at ₹1.5
trillion-1.6 trillion ($15.91 billion-$16.97 billion) for
fiscal year 2027.
The move comes as Brent crude hovers at around $105 per
barrel. The war has halted energy shipments through the Strait
of Hormuz, which carries about one-fifth of the world’s oil and
liquefied natural gas supplies.
Elevated oil prices are detrimental for India, the world’s
third-largest crude importer, threatening to worsen domestic
inflation and widen the current account deficit.
Meanwhile, India retained its inflation target at 4% for the
next five years.
Supply pressures have also continued to weigh on demand,
with Indian states looking to raise ₹42,490 crores through
bond sales later in the day, after already raising a record
12.31 trillion rupees this financial year.
RATES
India’s overnight index swap (OIS) rates witnessed heavy
paying pressure as oil prices and Treasury yields stayed
elevated.
The one-year OIS rate was not yet traded,
while the two-year OIS rate was at 6.2850%.
The liquid five-year swap rate was at 6.65%.