A prolonged conflict between Iran and Israel could escalate Indian government’s borrowing costs as bond yields may spike, triggered by a likely jump in global crude oil prices, said experts on April 15.
The 10-year benchmark bond yield, which opened flat on April 15, is likely to breach the 7.20 percent mark in the coming days, experts added.
“The rising tension between Iran and Israel has thrown this region into a deeper crisis. The unabated geopolitical tensions will cause crude prices to rise and that will be a big worry for us,” said V Ramachandra Reddy, Head, Treasury, The Karur Vysya Bank.
Experts, however, added that easing domestic inflation could limit the upside of the government bond yields.
Data released on April 12 showed that India's headline retail inflation rate eased to a 10-month low of 4.85 percent in March, as compared to 5.09 percent in February. This data was released by the Ministry of Statistics and Programme Implementation.
At 4.85 percent, it is the lowest since May 2023, when it touched 4.31 percent.
“In the current condition, the 10-year government securities yield may breach the 7.20 percent level, if the US treasury yield and Brent crude continue to move northward,” said Mataprasad Pandey, Vice President, Arete Capital Service.
Also read: Israel-Iran tensions unlikely to have any major impact on global markets, say experts
Iran-Israel crisis
On April 13, Iran fired over 300 drones and missiles at Israel, calling the attack a retaliation to a strike on its consulate in Syria, allegedly by Israel, earlier in the month.
Tel Aviv has said it would retaliate and "extract the price from Iran” and has urged for tighter sanctions against Tehran.
Making his first comments on the development, US President Joe Biden said commitment to Israel is 'ironclad'. “I just met with my national security team for an update on Iran’s attacks against Israel,” Biden said in a post on X, formerly Twitter. “Our commitment to Israel’s security against threats from Iran and its proxies is ironclad,” Biden said after returning to the White House from his private residence in Delaware.
A setback to MPC’s inflation battle?
The escalating problems in the Middle East pose a risk to India’s inflation trajectory, which has been going downward in the last few months.
This is because geopolitical tensions in the Middle East, which plays a crucial role in global oil supply, could lead to oil prices moving towards $100 a barrel. Rising oil prices remain a concern for India as it receives over 85 percent of its requirements from other nations.
“The rising commodity prices- specifically fuel- will derail the global deflation trajectory, including India's,” Reddy added.
Further, rising bond yields could make borrowing costlier for the government, which was earlier expected to be lower due to the expectations of large inflows from foreign investors on account of Indian bond inclusion in a global bond index.
In the first half of the current financial year, the government will borrow Rs 7.50 lakh crore through the issuance of government securities.
At Rs 7.50 lakh crore, the scheduled first-half borrowing of the central government amounts to 53.08 percent of the full-year estimate, the finance ministry said in a statement on March 27.
The Interim Budget for 2024-25 had pegged the Centre's full-year gross borrowing estimate at Rs 14.13 lakh crore from the markets.
Also read: Oil on boil as Iran launches attack on Israel; What would be the impact on petrol prices?
Yield movement
In the last two weeks, the yield on the government securities, especially the 10-year benchmark bonds, rose around 13 basis points (bps) due to global uncertainties, such as rising US Treasury yields and Brent crude oil prices.
The 10-year benchmark bond, which was trading at 7.056 percent on March 28, has surged to 7.177 percent on April 12.
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