Indian government bonds inched higher on Wednesday, with yields easing marginally after crude oil prices slipped below the $100-per-barrel mark amid reports of a potential US-Iran ceasefire plan.
The benchmark 6.48% 2035 bond yield stood at 6.8633%, compared with its previous close of 6.8681% on Tuesday. Bond yields move inversely to prices. Meanwhile, the yield on the US 10-year Treasury note declined by 5 basis points to 4.338%.
The uptick in bond prices followed a sharp decline in crude oil prices, which helped ease inflationary concerns. The benchmark Brent crude contract was nearly 5% lower at $99.60 per barrel, after falling to an intraday low of $97.15.
Crude oil prices declined on the recent positive developments in the US-Iran war. Reports said that the US is seeking a month-long ceasefire with Iran to facilitate negotiations aimed at ending the ongoing war in the Middle East.
According to reports, US President Donald Trump indicated progress in talks to end the war with Iran, with Washington said to have proposed a 15-point settlement framework.
The conflict has disrupted shipments of oil and liquefied natural gas through the Strait of Hormuz, a critical transit route that typically accounts for nearly one-fifth of global oil and gas supply.
Elevated crude oil prices remain a key risk for India, the world’s third-largest importer of crude, as they could exacerbate domestic inflationary pressures and widen the current account deficit. Economists warn that if Brent prices sustain above $100 per barrel, India’s current account deficit could exceed 2.5% of GDP, potentially resulting in a balance of payments deficit of around $85 billion.
However, gains in the bond prices were capped by supply concerns, as states are scheduled to raise ₹39,540 crore through bond issuances on Friday, following a record ₹12.31 lakh crore raised in the current financial year, according to a Reuters report.
Bond Market Outlook
Commenting on the Reserve Bank of India’s policy stance, Madhavi Arora, Lead Economist at Emkay Global Financial Services, said that the threshold for a conventional rate hike remains high in the face of a supply-side shock. However, she noted that it remains to be seen whether the RBI will continue to maintain abundant liquidity and sub-repo overnight rates.
“With the rupee under persistent pressure despite continued foreign exchange intervention — primarily through forward contracts — the associated liquidity impact has been deferred. At the same time, interest rates have been kept in check through the RBI’s bond purchases. A sharp policy response, such as raising overnight rates to curb FX arbitrage, appears unlikely at this stage,” Arora said.
She expects the USD/INR exchange rate to move towards 96, while the 10-year government bond yield could gradually rise to around 6.95%.
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