(Updates at market close)
Indian government bonds tumbled on Tuesday, with the 10-year yield hitting a three-week high, as a blistering oil rally after a flare-up in the U.S.-Iran conflict rattled sentiment and prompted investors to cut risk across assets.
The benchmark 6.94% 2036 bond yield climbed 6.4 basis points to 6.7945%, its highest since June 24. The rupee weakened 0.61% to 96.20 per dollar while shares in Mumbai fell 0.6%.
The 10-year yield rose to as much as 6.8152%, but short-covering towards the end of the session brought it back below the key 6.80% level.
Brent crude jumped 9.6% overnight in its biggest single-day rise in more than six years, and was last up 4.66% at $87.18 per barrel. The surge followed a third night of U.S.-Iran fighting, which disrupted flows through the Strait of Hormuz.
The oil shock rippled through global markets, pushing the U.S. two-year Treasury yield to a 17-month high on renewed rate-hike bets, while the 10-year yield touched a two-month peak before a key inflation print due after Indian market hours.
In India, data released on Tuesday showed retail inflation rose to 4.38% in June, slightly above market expectations. Several economists have rolled back calls for policy tightening, expecting inflation to stay controlled for the fiscal year.
"With the RBI likely to look through a supply-driven inflation shock, as long as passthrough is limited and inflation expectations remain anchored, we expect a rate pause from the RBI in FY27," Madhavi Arora, economist at Emkay Global wrote in a note.
Investors awaited Bloomberg Index Services' decision this month on inclusion of Indian bonds in its flagship index. Foreign investors have poured nearly $6.5 billion into Indian government bonds since June.
RATES
Overnight indexed swap rates rose sharply, driven by offshore paying, as traders priced in rising oil prices and risk of higher global rates.
The one-year rose 10.5 bps to 5.9350%, while the two-year surged 14.25 bps to 6.11%. The most liquid five-year swap rate jumped about 13.5 bps to 6.37%.
