After Israel’s attack on Iran, several uncertainties have been created around the world that have shaken the entire economy. As Iran is one of the leading OPEC nations, producing over 3,280.000 barrels/Day as of January 2025. This took a toll on India’s economy as well. In this article, we will discuss how such uncertainties can affect Indian Bond prices.
India’s 10-year bond yield has plunged over 1 percent in the last few days with currently at 6.262 percent. Below are the main points on how global uncertainty can trigger investor panic, raising Bond Prices and vice versa.
Investor Caution: In times of global uncertainty or tension, foreign investors often draw their money out of riskier markets like India and move into safer places like U.S. bonds, gold, silver, etc. This leads to reduced demand for Indian bonds, decreasing prices, and raising yields (interest rates).
Weakness in the Rupee: Tension can also lead to weakening of the Indian rupee. When the rupee declines, this makes it riskier for foreign investors to hold Indian bonds via currency and exchange rate fluctuations, leading to more selling and higher borrowing costs for the government.
Higher Inflation Risk: Tension may also raise the likelihood of crude prices rising due to oil supply disruption. Since India imports the vast majority of oil used for energy, this would add inflation to the Indian economy, which decreases the value of bond returns. This leads investors to demand greater yield to offset this risk.
Costlier Borrowing for Government: In order to deal with the rising cost of inflation or imports, the government may be required to borrow more funds. By issuing more bonds through borrowing, there could be downward pressure on prices and upward pressure on yields.
Reserve Bank of India Response: The Reserve Bank of India may be required to raise interest rates in order to combat inflation or to defend the rupee. If the central bank raises rates, then existing bonds producing income at lower rates become less attractive, effectively putting downward pressure on associated prices.
Conclusion
Geopolitical tensions create uncertainty for investors, increase inflation risks, and could create pressure on the Indian rupee. In the end, some investors may be unwilling to invest in bonds in India, which would lower bond prices and raise yields, which increases the borrowing costs for the government. This could raise interest rates for the rest of the economy, which means the normal person could be supporting higher rates on home loans, education loans, car loans, and other borrowings.
Written by Satyajeet Mukherjee
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