Indian government bonds were trading with a negative tilt in early deals on Monday, as fresh escalations in the U.S.-Iran war pushed up oil prices, derailing optimism after a supportive central bank policy decision.
The yield on the benchmark 6.48% 2035 note was at 6.9758% as of 10:30 a.m. IST, after closing at 6.9772% on Friday after the policy decision. Yields move inversely to bond prices.
On Friday, the yields had declined 2-3 basis points at the long end, and above 10 bps at the shorter end.
The benchmark Brent crude contract jumped 4.5% and was around $97 per barrel in Asia hours after Israel on Sunday struck Lebanon despite a truce, eroding hopes for an end to the wider war and a resumption of flows through the Strait of Hormuz.
India imports around 90% of its crude requirements, and elevated oil prices impact inflation as well as the current account deficit.
"We are living in times when negative factors have a much larger impact than the positive ones, and this is playing out in bonds," a trader with a primary dealership said. On Friday, the Reserve Bank of India kept the key policy rate and stance unchanged, while announcing a raft of measures to boost foreign participation in government securities and attract large dollar inflows.
The RBI offered cheaper currency swaps for overseas borrowing by public sector companies and lenders, while providing a complete hedging cover for banks to raise three- to five-year deposits from non-residents.
It also added 15-year, 30-year and 40-year government bonds to the so-called fully accessible route, which allows unlimited foreign investments, while New Delhi scrapped taxation on interest earned and capital gains from sale of securities.
RATES
India's overnight index swap rates edged higher tracking bond yields, and as higher oil prices encouraged paid positions.
The one-year swap was at 6.06%, while the two-year rate was at 6.27% and the five-year rate was at 6.56%.
