Indian government bonds slid on Monday after oil prices jumped as fresh U.S.-Iran strikes threatened a fragile ceasefire and stoked rate-hike worries ahead of a crucial policy meeting.
The Reserve Bank of India will announce its rate decision on Friday, with markets largely pricing in a pause even as Standard Chartered, Capital Economics, ANZ, MUFG and OCBC call for a 25-basis-point hike.
"While the case for a tighter monetary policy is strengthening, the timing of the move is a matter of debate," Radhika Rao, senior economist and executive director at DBS Bank said in a note.
"In our view, the monetary policy committee is likely to prioritise the key mandate, i.e. inflation, to decide on the path ahead, while relying on other instruments to stabilise the currency and bond markets."
India's inflation pressure is building. The rise in wholesale prices accelerated to a three and a half-year high in April. State-run fuel retailers have raised fuel prices four times in May. A forecast for a weak monsoon also poses further inflation risks.
India's benchmark 6.48% 2035 yield ended at 7.0181%, compared with 7.0037% on Friday. The yield dropped 6 basis points last week.
Brent crude futures were last up 2.25% at $94.12 a barrel, nearly 30% above pre-war levels.
Indian assets are highly exposed to swings in oil prices, with the country importing 90% of its crude needs. Since the war began, the rupee has lost 4.5% and bonds have fallen more than 5%.
On Monday, Iran and the United States said they had carried out strikes on military targets, with each accusing the other of aggression as diplomatic efforts to end three months of war dragged on.
RATES
India's overnight index swap rates ended 2 bps to 4 bps higher following the oil spike.
The one-year swap ended at 6.1150%, while the two-year and five-year rates settled at 6.33% and 6.6375% respectively.
