India bonds give up gains as high oil prices weigh

What happened

Indian government bonds ended lower on Monday, giving up early gains as high oil prices pressured the rupee. Brent crude hovered near $115 a barrel. The rupee fell 0.3% to 95.1850 per dollar, and the 6.94% 2036 bond yield ended at 7.4826%.

Confirmed

Global impact / market context

Higher oil prices raise India's import costs, which can weaken the rupee and feed inflation. That pushes investors to expect interest rate increases, which lift bond yields and lower bond prices, making borrowing more expensive for companies and the government.

Analyst inference

Bond yields had already risen for 10 straight weeks, the longest run since 1998. Overnight indexed swap rates, which are derivative contracts reflecting expected short-term interest rates, price in roughly 100 basis points of increases, while the RBI forecasts inflation peaking at 6%.

Analyst inference

What to watch

1. Watch whether Brent crude stays near $115 a barrel, since high oil prices pressure the rupee and Indian bonds. Confirmed
2. Yes Bank expects the RBI to keep its tightening bias, meaning a tendency toward higher rates, if oil stays high and inflation pressures broaden. Proposed
3. Watch the rupee and the 1-year OIS rate, which is a swap contract reflecting expected rates and prices in about 100 basis points of increases, for signs of tighter policy. Analyst inference

Evidence

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