India's 10-year bond posts best week in 7 years, leads emerging Asia as oil slides

The election outcome rekindled hopes for a resolution to the Iran war, sending oil prices down 17% for the week, their sharpest slide since April 2020.

For India, the world's third-largest oil importer and consumer, cheaper crude can curb inflation and reduce pressure on government finances. It has also lifted the rupee, which strengthened past 94 per dollar on Friday and gained 1.1% over the week, easing pressure on the Reserve Bank of India to defend the currency.

This week, Indian government bonds saw a remarkable performance, outpacing other Asian markets as benchmark yields dropped significantly. Following the Democratic win in the US midterms, crude prices fell sharply, enticing foreign investors back to purchase a significant volume of Indian bonds. This shift alleviates pressure on the Reserve Bank of India to maintain elevated yields, contributing to a positive outlook for Indian debt moving forward.

"The RBI was letting yields rise to support the rupee, but with the rupee appreciating, there is no need to keep yields higher," said Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank.

The yield on the benchmark 6.94% 2036 bond settled at 7.1898%, 2 basis points higher on the day but down 22 bps for the week, marking its strongest weekly showing since October 2019.

The yield wobbled on Friday, swinging between 7.12% and 7.22%, reflecting profit-taking and traders trimming exposure into the weekend rather than a break in the broader rally.

Still, overall sentiment remained constructive.

"Expect bond yields to soften further and wont be surprised if we break the 7.10% handle (on the 10-year yield) soon," said Nilesh Ved, founder at FX Smart, which provides treasury solutions to corporates.

Indian debt also rode the US Treasury bid, with the 10-year Treasury yield shedding about 10 basis points this week. That increased the allure of higher-yielding Indian paper, helping it outpace regional peers.

Foreign investors also returned, buying nearly 52 billion rupees (about $552 million) of Indian bonds, their largest weekly net purchase since July.

The collapse in crude has rapidly rewired expectations for RBI policy. Traders said it has blunted the case for front-loaded tightening, with overnight indexed swap (OIS) rates now pricing 50 to 75 basis points of rate increases, roughly half the 125 bps priced before oil's selloff.

The one-year OIS rate dropped 39 bps this week to 6.33%, the two-year dropped 40 bps to 6.34%, while the five-year rate tumbled 38 bps to 6.48%.