India 10-year bond yields near 4-year high on weak rupee, higher oil prices

India’s 10-year bond yield hit nearly a 4-year high on the first trading day of the week Monday following concerns over higher oil prices and weakness in the rupee, which could push the inflation higher over the coming months, prompting the Reserve Bank of India (RBI) to raise interest rates anytime soon.

The yield on India’s benchmark 10-year note, which moves inversely to its price, jumped 12 basis points to 8.143 percent, the yield on the long-term 15-year bonds climbed 8 basis points 8.430 percent and the yield on short-term 2-year traded 11 basis points higher at 7.988 percent by 06:40 GMT.

The Indian rupee hit a historic low of 72.69 on Monday following higher oil prices and heavy sell-off in emerging market currencies. At the time of writing, the rupee was trading 0.80 percent weaker against the U.S. dollar.

Looking at the August inflation data release on Wednesday, we expect inflation to fall below the central bank’s medium-term target of 4 percent due to weak food prices. However, the risk is skewed towards upside for the months to come.

The recent record high petrol and diesel prices are the root causes of concerns for the economists, who believe this could be inflationary, leading to higher interest rates.

Petrol and diesel prices hit a new record over the weekend. In Delhi, petrol price increased to INR80.50 per litre and diesel rate touched its highest level of INR72.61 a litre.

Oil prices which remained low in the last three years and favoured the world's sixth largest economy have now turned into a major burden, having increased over 50 percent since mid-2017.

We forecast that this could again disrupt the economic growth recovery sprouted after a slowdown caused by a cash purge in November 2016 followed by the introduction of a good and services tax in July last year.