Indian government bond yields ended April largely unchanged from the previous month’s closing levels, even as volatility picked up toward the end of the period amid a sharp rise in global crude oil prices and US Treasury yields. While the Reserve Bank of India’s (RBI) dovish stance helped anchor sentiment, external risks continued to exert upward pressure on yields.
The benchmark 6.48% 2035 government bond yield closed at 7.0148% on Thursday, slightly higher than 6.9928% in the previous session. Over the course of April, the yield moved in a broad range of 6.8648% to 7.1421%, compared to its March-end level of 7.0345%. The Indian rupee also hit a record low during the week.
A key driver of the late-month bond selloff was the surge in crude oil prices. Brent crude climbed above $126 per barrel during the week, hitting levels last seen in March 2022 following the Russia-Ukraine war. Elevated oil prices are a significant concern for India, a net importer of energy, as they heighten risks to inflation and widen the fiscal deficit.
Crude oil prices stayed above $100 per barrel for most of the month, amid persistent geopolitical tensions. Although the United States initially announced a two-week ceasefire with Iran on April 7 — later extended indefinitely — uncertainty continued to weigh on energy markets. Adding to concerns, Iran has largely shut the Strait of Hormuz, a critical chokepoint that carries roughly one-fifth of global energy supplies.
Global bond markets also faced pressure, with the 10-year US Treasury yield rising to a five-week high during the month. This followed the US Federal Reserve’s most divided rate decision since 1992, which dampened expectations of near-term rate cuts as rising energy prices heightened inflation concerns.
On the domestic front, the RBI maintained a status quo on policy rates and stance earlier in April, while reiterating its commitment to ensuring adequate liquidity in the banking system. This helped ease fears of an imminent rate-hiking cycle and provided some support to the bond market.
Rates
India’s overnight index swap (OIS) rates rose sharply in the latter half of April after declining earlier, though they still ended the month lower overall, reflecting the central bank’s accommodative signals.
The one-year OIS rate ended at 5.9950%, while the two-year swap rate closed at 6.23%. The five-year OIS rate settled at 6.61%, Reuters reported.
Radhika Rao, Senior Economist & Executive Director at DBS Bank, noted that the 10-year bond yield moved back towards the 7% mark, driven by Brent crude holding above $110 per barrel and markets increasingly pricing in tighter financial conditions. However, she added that recent government securities (G-sec) auctions saw healthy demand, aided by reduced long-end supply, which contributed to a modest flattening of the yield curve.
She also highlighted significant movements in the OIS market, with the one-year rate indicating a near reversal of rate cuts seen over the past year. This comes despite the RBI’s preference to look through temporary price pressures, provided core inflation remains contained.
Impact of rising crude oil prices
Market participants remain cautious as elevated crude prices continue to exert upward pressure on yields globally.
Vishal Goenka, Co-Founder of IndiaBonds, said rising oil prices are already weighing on bond markets worldwide, pushing yields higher. He noted that ongoing disruptions in the global energy supply chain could keep oil prices elevated for an extended period, negatively impacting bond prices.
“This increases the likelihood of an earlier-than-expected rate hike by the RBI, especially given the depreciation in the rupee. In such an environment, would be the right strategy for investors to invest in short-duration corporate bonds in the one- to two-year segment,” he said.
Saurav Ghosh, Co-Founder of Jiraaf, echoed similar concerns, stating that rising crude prices are keeping global bond markets under pressure. He pointed out that India’s 10-year benchmark yield has moved above 7%, while US Treasury yields have climbed past 4.4%.
“For India, a net energy importer, sustained elevated crude prices raise the risk of imported inflation, limiting the room for monetary easing and keeping G-sec yields under pressure. The Fed’s divided April 29 meeting, where rates were held at 3.5%–3.75%, reinforces its cautious stance. From here, the direction of bond yields will depend largely on the duration of the Hormuz blockade and the trajectory of crude prices,” said Ghosh.
(With inputs from Reuters)
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