India bonds sink on oil spike before Fed decision

The benchmark 6.94% 2036 bond yielded 7.4772% at 10:50 a.m. IST, up 4 basis points from its previous close. The 10-year yield had dropped by nearly five basis points on Tuesday, its steepest single-day decline in three months, after failing to breach 7.50%.

On the day, Brent crude climbed 1.5% to $115.40 a barrel after an attack on a Saudi Arabian biggest refinery revived concerns over supply disruptions from the conflict involving Iran and its proxies.

Indian government bonds experienced a significant decline after a prior rally due to rising oil prices. Brent crude oil prices increased following concerns over supply disruptions in Saudi Arabia. The US 10-year Treasury yield also rose, affecting the attractiveness of Indian debt. Markets are anticipating the Federal Reserve's policy decision and rate outlook, impacting investor sentiment.

India, the world's third-largest oil importer, is particularly vulnerable to oil-price shocks. Brent remains about $45 above its pre-war level, threatening to stoke inflation, widen the fiscal deficit and weigh on growth.

"Moves have become highly corelated to crude," a trader at a primary dealership said, adding that even a slight drop in prices can recover the mood.

The Reserve Bank of India expects inflation to peak at 6% in the July-September quarter, while growth is expected to slow to 7% in fiscal 2027 from 7.7% in 2025-26.

The US 10-year Treasury yield also rose around three basis points to 5.0238%, compressing the spread offered by Indian debt over dollar assets.

Markets are now bracing for the Fed's decision after Indian trading hours. While a pause is widely expected, investors will gauge the central bank's guidance for clues on its rate outlook.

Rates

The one-year OIS rose 5.5 bps to 6.69%, pricing in nearly 125 bps of rate hikes over the next 12 months. The two-year OIS gained 6.75 bps to 6.74%, while the five-year rose 5.5 bps to 6.87%.