India bonds give up gains as high oil prices weigh

Brent crude futures hovered near $115 a barrel, weighing on the bonds and currency of the world's third-largest oil importer.

The rupee weakened for a third straight day, falling 0.3% to 95.1850 per dollar.

Indian government bonds declined on Monday due to rising oil prices affecting market sentiment and the rupee. The rupee fell for the third consecutive day, adding pressure on bond yields and currency. India's central bank is expected to consider interest rate hikes to stabilize the currency amidst inflation concerns. The Reserve Bank of India has raised its inflation forecast, anticipating a peak of 6% in consumer prices.

The 6.94% 2036 bond yield ended 1 basis point above Friday's close at 7.4826%. It hit a low of 7.4537% during the day.

Bond yields move inversely to prices.

The benchmark yield rose for 10 straight weeks through Friday, its longest such run since 1998.

Mounting inflation concerns have already lifted expectations for tighter policy and driven overnight indexed swap rates higher. The 1-year OIS rate is pricing in roughly 100 basis points of rate increases over the next 12 months.

At its October policy meeting, the Reserve Bank of India raised its inflation forecast, with consumer price inflation now expected to peak at 6% in the October-December quarter, the upper end of its tolerance band.

"With oil continuing to exhibit an upside bias and more signs of generalisation of inflation pressures seen in the September CPI print, we expect the RBI to continue to maintain its tightening bias," Yes Bank said in a note.

The bank expects another 50 basis points of rate hikes, split into 25-basis-point moves in December and February.

Attention now turns to the US Federal Reserve's policy decision on Wednesday, where markets widely expect rates to remain unchanged.

India's OIS rates ended sharply higher after declining earlier with bond yields.

The 1-year OIS rate rose 7 bps to 6.6525%, while the 2-year rate jumped 4.5 bps to 6.7% and the 5-year rate surged 1.75 bps to 6.84%.