Indian government bonds tracked swings in crude prices on Monday, ending little changed after oil retreated from the day's highs on renewed hopes of negotiation between the U.S. and Iran to end their conflict.
Brent crude futures hovered near $88 per barrel at around 5:00 p.m. IST, after Iran's foreign ministry said talks with the U.S. could be pursued based on national interests.
The contract earlier climbed to a more-than-one-month high of $91.42. The benchmark 6.94% 2036 bond yield settled at 6.7770%, down from the day's high of 6.8315%. Bond prices move inversely to yields.
The rupee ended 0.17% weaker at 96.4450 per dollar.
India, the world's third-largest oil importer and consumer, is highly vulnerable to higher crude prices, which can widen its import bill, strain government finances and weigh on the rupee.
Overseas investors and foreign banks likely bought Indian bonds after the initial selloff, seeing value at higher yields, traders said.
Foreign investors have bought nearly $4.3 billion of Indian bonds under the fully accessible route since June 1. These inflows were driven in part by expectations that Indian bonds could be added to Bloomberg Global Aggregate Index, on which the index provider hasn't provided an update yet.
"If oil prices ease and Indian bonds are included in the Bloomberg index, Indian debt would offer significant value to foreign investors," said Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank.
Currently, oil prices and uncertainty around the monsoon are the other major concerns, Dash said.
Cumulative rainfall deficit is now 24% of the long-term average, as of July 17, PGIM India Mutual Fund wrote in a note.
RATES
India's overnight index swaps still ended higher as caution over the U.S.-Iran conflict lingered. The one-year rate rose 2.75 bps to 5.9525%, the two-year added 3.25 bps to 6.1175%, and the five-year climbed 3 bps to 6.4050%. ($1 = 96.2800 Indian rupees)
