India bond yields rise as spike in oil prices hurts sentiment

Indian government bond yields ended higher on Monday as a rise in oil prices weighed on the sentiment, while investors remained wary of the central bank's next move on additional supply.

The 10-year benchmark 7.18% 2033 bond yield ended at 7.3355% after closing at 7.3166% in the previous session.

"Violence in the Middle East has led to a crude price spike," said Puneet Pal, head of fixed income at PGIM India Mutual Fund. "Given the recent rise in yields which has pushed back the expectations of rate cuts, yields have entered attractive territory."

Oil prices jumped as investors priced in the possibility of a wider Middle East conflict which could impact supply chains.

The benchmark Brent crude contract was trading above $90 per barrel, stoking concerns about one of the most significant geopolitical risks to oil markets since Russia's invasion of Ukraine last year.

Elevated oil prices could mount pressure on local inflation after a soft September reading was outweighed by sticky U.S. inflation print last week that fuelled bets of higher-for-longer interest rates in the world's largest economy.

Indian inflation rate eased to 5.02% in September from 6.83% in August but remained above the central bank's 4% target.

Meanwhile, yields remained elevated after the Reserve Bank of India announced its intention to sell bonds via auctions to absorb banking system liquidity and market participants expect the central bank to sell 500 billion rupees ($6 billion) of bonds.

The rise in yields initially attracted demand from state-run banks. However, treasury officials warn that even the largest holders of such securities could go slow on purchases in the weeks ahead as the banking system liquidity tightens.

Traders continue to eye the RBI's timing and choice of papers for debt sale, as the banking system liquidity continues to remain in deficit for four straight weeks.