Bond yields jump, rupee weakens as oil surges after Trump says Iran deal is over

Mumbai: Indian government bond yields surged, and the rupee weakened sharply on Wednesday after US President Donald Trump declared that the memorandum of understanding with Iran was ‘over,’ reigniting fears of prolonged tension in West Asia and sending crude oil prices sharply higher.

The yield on the 10-year benchmark government bond climbed about 7 basis points to end at 6.76%, marking its steepest single-day rise in almost seven weeks. The rupee slipped 0.6% to end at 95.56 (provisional) per US dollar, its weakest level in about a month, according to data by Bloomberg.

The rise in crude oil prices renewed concerns over inflation and India’s external balances. Brent crude oil futures rose over 2% in the morning to $78 per barrel. On Tuesday, it had ended at $76.19 per barrel, Bloomberg data showed.

Oil prices climbed after the US launched fresh strikes on Iran and revoked a waiver that had allowed Iranian oil exports. The move followed Iran’s attacks on vessels passing through the Strait of Hormuz, once again triggering worries over disruptions to one of the world’s busiest energy shipping routes.

Market participants said the jump in oil prices was the primary trigger behind the sell-off in both bonds and the rupee.

“The sentiment today is a bit bad because the rupee depreciated and it was largely driven by crude because it hit $78 per barrel. If it goes beyond $80, then I think things will get worse,” said Rajeev Pawar, treasury head at Ujjivan Small Finance Bank.

However, Pawar said the current weakness could prove temporary if oil prices stabilize.

“Crude caused the rupee to move; rupee caused the bonds to move. So, one leading to the other, basically,” he said.

Pawar expects the benchmark 10-year bond yield to broadly trade in the 6.65%-6.85% range, while the rupee could fluctuate within about 50 paise on either side of the current levels, unless a major geopolitical event significantly alters market sentiment.

On the bond side, higher US treasury yields and rising overnight indexed swap rates also weighed on domestic debt markets. Some treasury executives expect the volatility to remain contained unless geopolitical tensions worsen significantly.

“With this development, the reversal in bond yields and INR is likely to continue. Bond yield should get a support near 6.85% and for INR it should be at 96.25,” said Gopal Tripathi, treasury head at Jana Small Finance Bank.

A rise in oil prices is particularly negative for India because the country imports the bulk of its requirements. Higher energy costs can widen the current account deficit, lift inflation expectations and reduce the likelihood of monetary easing, all of which tend to pressure the rupee and push government bond yields higher.

Investors also shifted towards the safety of the dollar, which strengthened against most global currencies. The dollar index remained above 101, adding further pressure on emerging market currencies, including the rupee.

Importers aggressively bought dollars to hedge against further increases in oil prices, while some foreign portfolio inflows and likely intervention by the Reserve Bank of India helped prevent a sharper fall in the domestic currency, foreign currency traders said.

On Monday, a Mint poll of eight economists showed that a steep fall in crude oil prices following easing of tensions in West Asia may not be enough to help the Indian rupee appreciate. Most expect the rupee to remain range-bound at 94-96 against the US dollar in the near term before gradually weakening again by March 2027.