Indian bonds bear brunt of elevated Brent crude prices, traders say volatility for short term

Brent crude prices had earlier shot up to $82 per barrel, before paring some gains to trade at near $77 per barrel

• Indian bond yields rose as Middle East tensions lifted oil prices
• 10-year bond yield climbed to 6.7042 percent from 6.6601 percent
• RBI rate cut hopes fade as oil prices may keep yields elevated

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Indian bonds sank by 4 basis points on March 2, as geopolitical tensions in the Middle East sparked fears that oil prices would continue to remain elevated in the near term. This could result in higher bond yields in the coming month, even as traders say this volatility will not last long.

The benchmark 10-year bond rose to 6.7042 percent, as compared to 6.6601 percent in the previous trading session. The government yield opened 2 basis points higher earlier in the day. Bond prices and yields move inversely.

Over the weekend, the United States and Israel jointly attacked Iran, which claimed the life of Supreme Leader Ayatollah Ali Khamenei. Iran’s retaliation to strike US and Israeli bases has now lifted the global stakes in the markets.

Brent crude prices had earlier shot up to $82 per barrel, before paring some gains to trade at near $77 per barrel. Even otherwise, the higher Brent prices have now put the spotlight on the Indian government bond yield, which was hovering near 6.65-6.67 percent in the previous few trading sessions.

Elevated oil prices could keep government bond yields on the rise in the near-term, which could further lead to inflationary pressures. However, the market participants expect the prices to be stabilised in the next few weeks, and yields could come back to the 6.65-6.67 percent levels.

“We cannot decide in one day. So we have to wait and watch on a sustainable basis. This is a temporary phenomenon that can be controlled over a period.  And, there will definitely be resistance for the G-sec yield to go beyond 6.70 percent because banks will take a major hit if it goes above that level, as they will make treasury losses,” Venkatakrishnan Srinivasan, a bond expert, said.

This has also put the central bank under focus, with the next monetary policy meeting in April. The RBI had stood pat in the first meeting of the year, maintaining its neutral stance,  stating that it would wait for further cues for any action on interest rates.

“The likes of India and other emerging Asian countries could see a spike in current account deficits if oil prices were to spike on a sustained basis. We don’t think Asian central banks will hike rates just because of this risk. But this will probably reduce the possibility of a rate cut from India,” analysts at Japanese bank MUFG wrote in a research note.