MUMBAI: Government bond yields rose on Monday as a sharp surge in global crude oil prices stoked fears of higher inflation and delayed monetary easing, offsetting the Reserve Bank of India’s (RBI) move to inject ₹1 trillion of liquidity through open market operations.
The yield on the 10-year benchmark government bond rose 8 basis points to 6.76%. It had closed at 6.68% on Friday.
Brent crude futures for May delivery jumped over 20% in trading on Monday to near $120 a barrel, the highest since June 2022, as the US-Israel conflict with Iran continued, prompting some major West Asian producers to cut supplies and raising fears of prolonged disruption to shipments through the Strait of Hormuz. Crude prices are currently trading at about $110 a barrel.
The surge in crude oil prices and a fall in the rupee to a low of 92.3350 per dollar, amid escalating conflict in West Asia, drove traders to dump bonds.
The rupee opened at 92.1975 per dollar on Monday, but soon slid to 92.33 amid persistent dollar demand, according to a Reuters report. The Indian rupee had tumbled to a .
Broadly, the rupee is seen on a depreciating trend but is not weakening as sharply as traders had expected, as the RBI continues to intervene in the market to support the currency.
“Considering crude prices will continue to hover over $100 per barrel, and the war doesn’t escalate, the rupee is looking to trade in the range of 91.50 to 93.25 per dollar in the near term,” Ritesh Bhansali, deputy chief executive officer at Mecklai Financial Services said.
Iran on Monday named Mojtaba Khamenei to succeed his father, Ali Khamenei, as supreme leader, signalling the leadership remains firmly in control, a week after the US and Israel launched the war.
“Normally, the RBI’s announcement of OMO (open market operations) purchases should have helped yields to improve along with money market instruments but globally sentiments are not supported. So, I do not think government bond yields would soften significantly anytime soon,” a senior treasury official said.
Yields stay elevated
In a major move, the RBI announced OMO purchases worth ₹1 trillion in two batches starting this week to ensure adequate liquidity in the banking system and prevent tight conditions in money markets. The step comes as demand-supply dynamics, tight liquidity and rupee depreciation have kept government bond yields elevated for much of the current financial year, despite a 125 basis-point cut in policy rates.
Market participants expect the move to keep liquidity comfortable but say it is unlikely to directly rein in yields if global factors continue to dominate.
“Volatility has shortened investment horizons across markets and bond yields are going to harden in the near term,” Killol Pandya, head of fixed income at JM Financial Asset Management said.
Pandya expects the benchmark 10-year yield to move higher from current levels. “We are already at around 6.75%. The worst estimate which I can think of is somewhere north of 6.80%, maybe towards 6.85%, but I don’t really see the 10-year going above 6.85% at all for now,” he said.
Market participants expect the surge in oil prices to have a stronger impact on inflation. Over the weekend, the government increased the price of domestic LPG by ₹60.
“Further, the increase in weightage of the crude basket in the new CPI series is higher than that in the old series, making the impact of crude on CPI numbers higher,” Killol said.
Seasonal factors may also tighten liquidity conditions in the coming weeks.
“With March seasonality kicking in, advance tax outflows and month-end pressures will tighten cash conditions. Across the bond market, short term as well as long term, yields are likely to stay on the higher side rather than seeing a sudden drop,” he said.