Indian government bonds stumbled in early trade on Tuesday as oil topped $90 a barrel, amplifying jitters over the central bank's early end to a diaspora deposit incentive that had buoyed liquidity and demand.
The yield on the benchmark 6.94% 2036 bond crept up 3 basis points to 6.8407% by 10:45 a.m. IST. It had jumped 5 bps on Monday, its steepest one-day rise in over a month. Bond yields move inversely to prices.
The Reserve Bank of India said last week it will close a zero-cost swap facility a month early, ending a hedge offered to banks in June for foreign-currency deposits from non-resident Indians.
Better-than-expected inflows from the scheme, which topped $50 billion, prompted the early close, while policymakers were also wary of the domestic liquidity effects and the cost of such fundraising, analysts said.
"Liquidity from FCNR inflows had been finding its way into the five- to six-year segment and the liquid 10-year bond. As that support fades, the market is becoming far more exposed to swings in oil prices and global rates," a private-bank trader said.
Brent crude topped $90 a barrel in Asian trade for the first time in nearly three weeks. The 60-day U.S.-Iran ceasefire expired on Monday, with neither side indicating an intention to renew it.
India, the world's third-largest oil importer, is especially vulnerable to oil price gyrations. The RBI's measures in June had cushioned markets from an oil shock, supporting bond demand and the rupee.
The five-year note is the worst hit on the curve, with its yield rising 8 basis points on Monday and a further 3.5 basis points on Tuesday to 6.4680%. Traders now await a 202-billion-rupee state debt sale to test appetite.
RATES
India's overnight index swap rates surged on strong paying bias, underscoring the hit to market sentiment from the RBI's swap pullback.
The one-year swap was up 5.5 bps at 5.8350%, the two-year rate jumped 6.5 bps to 6.06%, and the liquid five-year rate climbed 9 bps to 6.4250%.
