Indian bonds may slide again as crude rebounds near $112

what happened

Reuters reports that Indian government bonds are expected to weaken in early trading on Wednesday, as oil prices hold at elevated levels and stoke inflation fears. The 6.94% benchmark maturing in 2036 may trade in a 7.37% to 7.42% range, according to a dealer at a primary dealership, after closing the prior session at 7.3920%. Domestic debt markets were shut on Tuesday for a local holiday.

Brent came close to $112 a barrel on Tuesday for the first time in five months, and Asian trading kept it firm amid worries over supply. Attacks by Houthi militants across Saudi Arabia, a fire on a supertanker and risks to Red Sea shipping all add to the strain. India buys close to 90% of its crude abroad, so disruptions hit its inflation, the rupee and public finances hard. September consumer inflation reached 5.54% and is on course to exceed the central bank's 6% tolerance ceiling in October. The Reserve Bank of India raised its policy rate and shifted its stance two weeks ago, and minutes due after the market closes may clarify its thinking. Overnight index swap rates, expected to track oil and US Treasury yields, closed at 6.53% for one year, 6.60% for two years and 6.78% for five years.

why it matters

For markets, this points to pressure on Indian debt: costlier crude fuels inflation expectations, which typically pushes yields and swap rates higher. The RBI minutes, released after the close, should show how the central bank views the situation.

market impact

Indian bonds and OIS rates: higher oil feeds inflation fears, pressuring rupee-linked debt

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