India bonds skid on 25% oil surge as Middle East war shows no sign of abating

India bonds skid on 25% oil surge as Middle East war shows no sign of abating

• Indian government bonds fell as Brent crude jumped 25% to $115.92
• Bond yields surged, inflation may rise by 50-60 basis points
• RBI to buy 500 billion rupees in open market to stabilize markets

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Indian government bonds tumbled as the escalating conflict in the Middle East put Brent crude futures on track for their biggest-ever single-day jump, a major inflationary and foreign exchange concern for the world's third-largest crude importer.

With no sign of an end to hostilities in the Middle East and tankers unable to cross the Strait of Hormuz, Brent soared 25% to $115.92 a barrel.

The benchmark 6.48% 2035 bond yield surged 6 basis points as of 11:40 am to 6.7503%, versus Friday's close of 6.6898%, headed for its biggest single day rise since the government announced a larger than expected borrowing plan at the start of February.

"Crude and weakening rupee are a double whammy for the market," said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank.

"If this sustains, inflation could move up by 50-60 bps at least."

India's January retail inflation rate, the latest available, stood at 2.75%.

As the U.S.-Israeli conflict with Iran enters its 10th day, Iraq and Kuwait have curbed oil output, while analysts say the United Arab Emirates and Saudi Arabia may also have to reduce production as storage capacity fills up.

Bond market traders say they are counting on the central bank to continue with secondary market debt purchases along with the planned open market operation to temper the selloff in bonds.

The Reserve Bank of India will conduct an open market purchase worth 500 billion rupees ($5.42 billion) later in the day, which includes multiple liquid papers such as the former benchmark 6.33% 2035 bond. The central bank net bought 99 billion rupees of bonds last week, per its website.

RATES

India's long-term overnight index swap rates shot up on paying pressure as surging oil prices spooked investors.

The one-year OIS was up 13.25 bps at 5.74%. The two-year OIS rate surged 18.5 basis points to 5.96%. The most liquid five-year OIS rate gained 15.5 bps to 6.37%.