Mumbai, March 4 Indian government bond yields rose to nearly a three-week high on Wednesday afternoon, tracking a sharp increase in global crude oil prices amid escalating tensions in the Middle East.
The yield on the benchmark 10-year government security rose to 6.7112 percent, its highest level since February 20, according to market participants.
Traders said the surge in crude prices, particularly Brent crude nearing USD 85 per barrel in recent sessions, triggered a sell-off in domestic bonds, pushing yields higher. Rising oil prices are seen as inflationary and could widen India's current account deficit, dampening sentiment in the debt market.
"The recent escalation in tensions involving Iran and Israel has pushed crude prices higher and weakened the rupee, which has led to a mild uptick in India's benchmark 10-year government bond yield to around 6.71 percent, a three-week high," said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.
Srinivasan, however added that the move in the bond market has been relatively contained compared with the sharp reaction in equities and currency markets.
"This suggests that while global risk factors are influencing sentiment, domestic technical factors are preventing a sharper spike in yields," he said.
Geopolitical risks intensified after a joint military offensive by the US and Israel against Iran over the weekend. The conflict has since widened, with retaliatory missile and drone attacks reported, escalating fears of a prolonged regional crisis.
Adding to concerns, the Strait of Hormuz, a critical global oil transit chokepoint, has been shut, disrupting supplies. The development is particularly significant for India, as nearly 40 per cent of its energy imports are routed through the passage, raising worries over supply disruptions and imported inflation.
Amit Modani, senior fund manager, lead, fixed income at Shriram AMC, said rising crude prices and currency pressures could influence the policy stance of the Reserve Bank of India (RBI), reinforcing expectations of a higher-for-longer interest rate trajectory.
"In addition, the unprecedented nature of the escalation has introduced a significant geopolitical risk premium, prompting investors to reprice domestic yields and reassess capital flow dynamics," he said.
Further, Srinivasan said the government's G sec auction calendar is expected to conclude around March 15, after which supply will remain limited until month-end.
"With supply temporarily drying up and balance sheet considerations in play, yields may remain range-bound in the near term even if global volatility persists," he added.
