India's 10-year bond yield rises 2 bps after US strikes Iran, dollar gains strength

Bonds

Indian bond yield rose 2 basis points (bps) in early trade on June 23, after US strikes on Iran nuclear sites over the weekend triggered a sharp surge in crude oil prices in international market. The 10-year benchmark bond yield was trading 6.329 percent as compared to 6.309 percent at close on Friday.

The US dollar was stronger on higher investor demand in response to the rising geopolitical risks following US President Trump's strikes on Iran's nuclear facilities. Some currency market told Reuters that the rise in oil prices following the US action was milder than expected, with markets choosing to wait and see to what extend Iran would respond.

Early on early June 22, the conflict between Iran and Israel took a dramatic turn after Trump confirmed that American warplanes bombed three nuclear sites in Iran, including the Fordow uranium enrichment plant, a key part of Tehran’s atomic infrastructure buried deep within a mountainside near Qom. The strikes were the first time the US directly struck Iran’s nuclear facilities since hostilities began, with Iran vowing retaliation. Iran’s parliament is reported to have backed closing the Strait of Hormuz through which around 20 percent of the world’s oil and gas demand flows following US bombing.

The widening conflict fired up crude prices in the international market and dollar index, putting pressure on the domestic currency and prices. Usually, when the crude oil prices rises, it pose pressure on the domestic inflation.

India, which imports over 85 percent of its energy needs, faces heightened macroeconomic vulnerability from rising oil prices. A $10 per barrel increase in crude could widen the country’s current account deficit by 0.3 percent of GDP and exert upward pressure on inflation.