India bonds rise as crude retreat eases risks

Indian government bonds opened firmer on Monday as a decline in crude oil prices boosted demand and eased concerns about inflation and further interest-rate hikes. The benchmark 6.94% 2036 bond yield, which had closed at 7.4139% on Friday, was seen trading in a 7.35%–7.39% range and fell around 5.5 basis points to 7.3612% by late morning. The move extended a roughly 6-basis-point fall in the 10-year yield last week, following a more than 70-basis-point surge over the prior 10 weeks.

Bond yields moved inversely to prices, reflecting renewed buying interest as investors responded to the softer oil backdrop. The rally comes after a prolonged period of rising yields, the longest such streak since at least 1998, underscoring how sensitive the market has been to recent commodity and policy developments.

Brent crude futures, which had touched six-month highs last week, retreated in Asian trade to $109.75 a barrel after a 3.2% decline.

For India, a major oil importer and consumer, lower crude prices reduce pressure on inflation, the current account, and fiscal balances. This in turn can temper expectations of aggressive tightening by the Reserve Bank of India. A private-bank trader noted that lower oil prices could extend short-covering in bonds, while also observing that a durable rally may depend on clearer signals about the conflict and oil prices.

Traders are watching the upcoming US midterm elections for clues on the trajectory of the war, oil prices, and the broader global interest-rate outlook. Market participants are assessing whether the election outcome may alter prospects for a ceasefire and support a sustained correction in crude prices.

One trader highlighted that there remains a risk of a 50-basis-point rate hike in December if inflation stays elevated, while suggesting that a peace deal and a meaningful drop in crude could unwind some of those expectations. The Reserve Bank of India raised its policy rate and shifted its stance in October, signalling scope for further tightening, and it expects inflation to peak near 6% in the third quarter.

System liquidity was near neutral at 304 billion rupees on Thursday, which may cap demand for debt, with India rates under pressure from a sharp tightening in domestic liquidity conditions. DBS Bank said the RBI's efforts to manage rupee volatility were amplifying these pressures.

Interest-rate swap markets reflected the softer rate-hike fears. The one-year overnight indexed swap rate eased to 6.6750%, the two-year fell to 6.6850%, and the five-year declined to 6.7975%. The rupee also showed a modest gain, strengthening 0.08% to 94.87 per US dollar, aligning with the improved sentiment from falling crude and firmer bond prices.