Indian government bonds fell this week as surging oil prices, a global debt rout, and concerns over the RBI's liquidity stance pushed the benchmark 10-year yield above 7%, wiping out gains from the central bank's June measures to attract dollars.
Brent crude neared $110 a barrel in Asian trade, before easing to around $103. Prices gained more than 7.5% this week as attacks on key Middle East shipping routes raised fears of prolonged supply disruptions.
The oil rally rattled global debt markets, driving the U.S. 10-year Treasury yield toward 5% as investors repriced inflation risks and the likelihood of a near-term U.S. rate hike.
The yield on India's benchmark 6.94% 2036 bond jumped 5 basis points to 7.0233%, its highest in more than three months. It added 6 bps this week, extending losses into a fourth straight week.
The five-year bond led the selloff, with its yield up 10 bps on the day at 6.6202%.
Pressure rose further after RBI Governor Sanjay Malhotra said the central bank could use any liquidity tool, including bond sales and FX swaps, to absord the 10-trillion-rupee plus liquidity surplus and keep the overnight rate aligned with the repo rate.
"Any measures to absorb excess liquidity through VRRR operations, FX swaps, OMOs or reserve requirements could influence the near-term trajectory of bond yields," Axis Mutual Fund said in a note.
The RBI also partially cancelled an auction of shorter-dated government bonds for the first time in a year, signalling concern over rising borrowing costs, traders said.
Investors now await U.S. inflation data later on Friday, India's inflation reading on Monday and the Federal Reserve's policy decision next week for further cues.
RATES
Overnight indexed swap rates surged along with bond yields, with traders saying markets were increasingly pricing in an RBI rate hike as early as October.
This week, the one-year rate added 4 bps to 6.03%, the two-year rose 6 bps to 6.24%, and the liquid five-year jumped to 6.57%, up 10.5 bps.
