Indian Bonds Slip as Oil Spike and Fresh Debt Supply Weigh

Indian government bonds opened lower on Friday, reversing some of the week's gains, as a sharp rise in global crude prices and an upcoming debt auction weighed on investor sentiment.

The benchmark 6.94% 2036 bond yield rose 2 basis points to 6.7869% in early trade, putting it on track for its first weekly decline in five weeks. The move mirrored a similar uptick in U.S. Treasury yields, which climbed 7 basis points overnight to 4.68% on the back of higher oil, reducing the appeal of emerging market debt.

New Delhi is set to raise 320 billion rupees ($3.36 billion) through a sale of bonds maturing in five and 40 years later in the day. Market participants are closely watching demand for the long-dated paper, with one trader noting that geopolitical tensions and soaring crude prices are stoking fears of higher global rates.

Brent crude futures were last trading near $83.71 per barrel, up nearly 6% from Tuesday's close of around $79. As the world's third-largest importer of oil, India faces a higher import bill, potential inflationary pressure, and a weaker rupee if prices stay elevated.

However, the Reserve Bank of India's (RBI) more dovish-than-expected policy statement on Wednesday has eased immediate inflation concerns. The central bank kept its repo rate unchanged while cutting its inflation forecast and promising sufficient liquidity, prompting some analysts to push back expectations for rate hikes. This stance, along with inflows into the RBI's foreign-currency scheme for non-residents, continues to support demand at the short end of the curve.

In the derivatives market, overnight index swap rates also moved higher due to global headwinds. The one-year swap rose 1.75 basis points to 5.7850%, the two-year climbed 3.25 basis points to 5.98%, and the five-year was up 2.5 basis points at 6.2850%.