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India Bonds Plunge Amidst Crude Oil Surge
21 Aug
Summary
- Government bonds experienced their worst week of the financial year.
- A spike in crude oil prices intensified inflation and rate hike fears.
- RBI's hawkish policy minutes contributed to the bond market selloff.
Indian government bonds experienced their worst weekly performance of the financial year, primarily driven by a surge in crude oil prices and hawkish signals from the Reserve Bank of India (RBI).
The escalating crude oil prices, reaching $93.4 a barrel for Brent futures, heightened concerns over inflation and potential interest rate hikes in India, the world's third-largest oil importer.
Sentiment in the bond market deteriorated further following the release of the RBI's August meeting minutes. These minutes indicated a more hawkish stance than previously communicated, suggesting the central bank has concluded its easing cycle and may consider rate hikes.
Adding to the pressure, the RBI announced the early closure of its discounted diaspora-deposit hedging facility. This move reduced liquidity and bond demand, particularly impacting the five-year note, which saw a significant yield increase.
Consequently, the Indian benchmark bond yield climbed, and overnight indexed swap rates showed a pronounced repricing of rate hike expectations, with one-year and two-year rates rising considerably.
