India's benchmark bond had its worst day in more than three months on Wednesday, after U.S. President Donald Trump said the peace deal with Iran was "over", sending oil prices soaring and sparking a risk-off across global markets.
The 6.94% 2036 bond yield settled at 6.7636%, up 6.8 basis points, its sharpest rise since April 2. Bond yields move inversely to prices.
Brent crude futures jumped nearly 6% to $78.31 per barrel after Trump's remarks, while the U.S. 10-year Treasury yield rose to a one-month high of 4.5731%.
India, the world's third-largest oil importer and consumer, is vulnerable to elevated crude, which hurts growth, raises inflation and worsens the fiscal and monetary policy outlook.
"Should crude prices rebound towards $90 per barrel, inflation expectations could come under renewed pressure, thereby pushing the benchmark 10-year yield higher into the 6.90%-6.95% range," said Harsimran Sahni, head of treasury at Anand Rathi Global Finance.
Brent's surge dragged the benchmark Nifty 50 down 2.12%, while the rupee weakened 0.62% to 95.5550 per dollar.
India's overnight index swap rates leapt the most in several weeks, mirroring the caution in the market.
The one-year rate ended at 5.8%, up 7 basis points, its biggest jump in about a month. The two-year rose 8.5 bps to 5.9575%, while the five-year rate climbed 9 bps to 6.21%, both posting their biggest rise in around seven weeks. FOREIGN INFLOWS IN FOCUS
Indian bonds have been drawing steady foreign interest, which has been supporting the market. Overseas investors have net bought debt worth 362 billion rupees, or $3.81 billion, since the start of June.
Inflows under the so-called fully accessible route, which allows unfettered flows, have been strong after a raft of regulatory measures and on expectations Indian bonds would be added to Bloomberg's Global Aggregate Index.
"A formal inclusion in the Bloomberg index could provide an additional catalyst for foreign inflows in the short term, but we do not expect the 10-year benchmark yield to breach below 6.70% any time soon," Sahni said.
