Indian bond yields spike to six-week high as crude oil price rally jolts markets

Indian government bond yields spiked to a nearly six-week high on Monday, following a sharp rise in global Treasury yields as surging crude oil prices reignited inflation concerns.

The benchmark 6.48% 2035 bond yield rose about 7.5 basis points to 7.1427%, hovering around a six-week high, and on the verge of breaking out to hit its highest in two years. Bond prices move inversely to yields.

The spike in yields comes amid a broad sell-off in global bond markets, triggered by escalating US-Iran war in the Middle East and a sharp rally in crude oil prices.

Global bond rout weighs on sentiment

Higher US Treasury yields tend to reduce the attractiveness of emerging-market debt by narrowing the return premium, often leading to foreign capital outflows and exerting pressure on local currencies.

Reflecting the stress, the Indian rupee weakened further, falling 0.36% to a fresh record low of 96.3125 against the US dollar.

Bond markets from Tokyo to New York came under pressure following fresh attacks in the Gulf region. The yield on the benchmark 10-year US Treasury note surged to a 15-month high of 4.6310%, Reuters reported.

In Japan, the 30-year government bond yield jumped as much as 20 basis points to its highest level since the tenor was introduced in 1999. Yields on 10-year US Treasuries rose three basis points to 4.63%, their highest since February 2025, while 30-year US bond yields climbed above 5%, nearing levels last seen in 2007.

Australian and New Zealand bond yields also advanced, while European bond futures were under pressure.

“Markets are increasingly worried that higher energy prices could keep inflation elevated for longer. For India, persistently high crude prices raise imported inflation risks, reducing the RBI’s flexibility on rate cuts,” said Saurav Ghosh, co-founder of Jiraaf.

According to him, at this stage, bond markets are signalling caution, with yields likely to stay elevated until geopolitical tensions ease and inflation expectations stabilise.

Crude oil prices rally

Crude oil prices surged following renewed escalation in the US-Iran war after a UAE nuclear facility was reportedly attacked over the weekend. US President Donald Trump also indicated the possibility of further military action against Iran, raising concerns over the durability of a fragile ceasefire that has been in place since early April.

Brent crude futures rose 0.73% to $110.06 per barrel on Monday, extending last week’s gains of nearly 8%.

For India, the world’s third-largest crude oil importer, persistently elevated energy prices pose a significant macroeconomic risk, potentially stoking inflation, slowing growth, and widening trade imbalances.

India’s goods trade deficit rose to $28 billion in April 2026 from $21 billion in March 2026, led by a sharp rise in oil imports, reflecting the war-led energy price spike

“While we maintain the estimates for current account deficit (CAD) to GDP ratio for fiscal year 2027 at 1.7%, assuming oil at $80/barrel on average, risks of CAD widening to over 2% are rising with oil prices remaining above $100,” said Madhavi Arora, chief economist at Emkay Global Financial Services.

Arora said policymakers may consider additional measures to curb foreign exchange outflows, citing media reports suggesting potential restrictions on electronics imports, Liberalised Remittance Scheme (LRS) norms, and foreign travel.

“These measures would provide some buffers to CAD; however, oil prices will remain the largest driver of external balances in FY27,” she added.

RBI liquidity support may provide relief

Market participants are also awaiting the Reserve Bank of India’s (RBI) surplus transfer to the government later this month, which could improve liquidity conditions and offer some support to shorter-duration bond yields.

According to Vishal Goenka, co-founder of IndiaBonds.com, US interest rates remain a key benchmark for global borrowing costs and foreign exchange dynamics.

“Due to the Middle East geopolitical situation and its impact on oil prices, India would likely have to hike interest rates soon in face of growing inflationary pressures in the economy. Retail oil-related prices have already started being revised upwards since last week,” said Vishal Goenka, Co-Founder, IndiaBonds.com.

He added that one way to cushion the impact of rising rates would be to rationalise the tax treatment of bond investments by capping the tax on bond interest income at 20% — in line with the highest tax rate applicable to equities — instead of the prevailing slab-based taxation.

“This would encourage demand for fixed income in the country and unlock household balance sheets to support the capital formation in the economy,” said Goenka.

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