Indian bonds slip on higher oil, hawkish RBI governor comments

The benchmark 6.94% 2036 bond yield was at 7.3886% as of 9:45 a.m. IST, after closing at 7.3655% on Tuesday. Bond yields rise when prices fall.

Earlier, the yield jumped to 7.4112%, the highest since March 2023, and has gained 20 basis points since the central bank's rate hike last week.

Indian government bonds faced a downturn, attributed to soaring oil prices and statements from the Reserve Bank of India. The yield on the benchmark 6.94% 2036 bond rose following the central bank's recent rate hike. Geopolitical tensions involving Yemen and Saudi Arabia also pushed oil prices higher. With consumer inflation expected to exceed the central bank's upper tolerance limit in October, traders are keenly awaiting U.S.

Oil prices climbed in Asian hours, as traders reacted to supply risk from the fight between Yemen's Iran-allied Houthis and Saudi Arabia

The benchmark Brent crude contract was around $107 per barrel, and elevated energy prices weigh heavily on oil-import-dependent India, pressuring inflation and the currency.

In a media interview on Tuesday, Reserve Bank of India Governor Sanjay Malhotra said the central bank does not generally use monetary policy to safeguard financial stability, but the two cannot be entirely separated.

The comments come after the central bank has taken a host of measures to support the local currency, some of which are expected to reduce liquidity surplus.

Last week, the RBI raised the key policy rate to 5.50% and changed its policy stance to calibrated tightening, hinting at more rate hikes.

India's September consumer inflation accelerated to 5.54%, set to cross the central bank's upper tolerance band in October.

If September's jump is followed by a series of higher prints, the case for rate hikes could solidify, HSBC said in a note, as it also supports a stronger rupee.

Traders awaited the United States' inflation data due later to seek clarity on the Federal Reserve's interest rate trajectory, after last month's rate hike.

Rates

The one-year OIS rate was at 6.37%, while the two-year rate was at 6.55%, and five-year rate was at 6.78%.