Indian government bonds fell early on Thursday as escalating tensions in the Middle East pushed crude oil prices closer to $100 a barrel, while rising U.S. Treasury yields also weighed on investor sentiment.
The benchmark 6.94% 2036 bond yield was at 6.8180% as of 10:05 a.m. IST, after closing at 6.8012% on Wednesday.
"Indian bonds are starting to look vulnerable as higher oil prices threaten to revive inflation pressures and weaken the rupee. Unless crude cools meaningfully, yields may have more upside," trader with a state-run bank said.
Brent crude futures were higher for the fifth consecutive session on Thursday, and crossed $96 per barrel in Asian hours, their highest in more than six weeks.
Oil prices extended their rise as the United States launched a new round of strikes on Iran, marking its 12th consecutive night of attacks. Yemen's Houthis, in retaliation targeted oil tankers in the Red Sea.
The rising attacks could further disrupt energy supplies, threatening to deepen the shortfall in global markets triggered by the closure of the Strait of Hormuz, which used to transit nearly a fifth of global supply before the war.
India imports almost 90% of its crude oil requirement and is vulnerable to any supply shock as higher crude prices can swell its import bill, push up inflation and pressure the rupee.
"Should oil prices remain elevated and concerns over fuel shortages persist, the spillover effects could be significant, particularly for energy-intensive industries and economies with large external energy needs," MUFG said in a note.
RATES
India's overnight index swap (OIS) rates moved 4-5 basis points higher absorbing the impact of oil and Treasury yields.
The one-year swap rate was at 6.04%, while the two-year rate was at 6.21%. The most liquid five-year rate was at 6.52%.
