Indian bond yields jumped on Tuesday as a rally in global crude oil prices raised worries about higher imported inflation, while a selection of papers for this week’s bond buyback by the central bank also disappointed investors.
The most-traded 6.64% 2035 bond was up 6 basis points at 6.79%, while the second-highest traded 5.63% 2026 paper rose 7 bps to 5.83%. Both bonds were trading at levels last seen in mid-March.
The 10-year bond, which is likely to be soon replaced as the benchmark paper, was up 6 bps at 6.15%, its highest since April 16.
HDFC Bank said rising oil prices and lack of liquid papers in this week’s government securities acquisition programme (GSAP) or a form of quantitative easing programme of the Reserve Bank of India, is weighing on bond prices.
“The market was hoping for the inclusion of the 5-year paper in the upcoming debt purchase given the recent devolvement of the paper by the RBI,” HDFC economists wrote.
Underwriters to the auction or the primary dealers had to buy 104.95 billion rupees ($1.41 billion) worth of the 5.63% 2026 bonds at the debt sale last week.
The central bank is scheduled to sell 260 billion rupees worth of bonds on Friday, including 140 billion rupees worth of a new 10-year paper.
RBI announced a buyback of bonds worth 200 billion rupees on Thursday under the GSAP but traders said most securities it has proposed to buy are illiquid and would not necessarily help tame yields and offset the impact of high global crude oil prices.
Oil prices hit some of their highest levels since 2018 after OPEC+ discussions were called off, heightening expectations that supplies will tighten further just as global fuel demand recovers from a COVID-19-induced slump.
India imports more than two-third of its oil requirements and higher prices usually translate to higher inflation.
The central bank has voiced to keep rates low to support the economic recovery but rising inflation could force its hand, traders fear.
“Another added pressure for the short end of the curve is the additional borrowing for GST (goods and services tax) compensation shortfall that is likely to be done starting July by selling bonds at shorter tenures (less than 7 years)”.
In late-May, the government said it will borrow an additional 1.58 trillion rupees to compensate states for their shortfall in revenues.