India bond yields near 7.07% as oil tops $107 (2026)

What moved the bond market

Indian government bonds opened the new fiscal year on the back foot, extending a selloff that had already built through March. Traders pointed to a fresh jump in crude oil after US President Donald Trump said attacks on Iran would continue for the next two to three weeks, dimming hopes of a quick end to the conflict. Brent crude futures rose more than 6% to about $107 a barrel in the session cited by Reuters. In the backdrop, the International Energy Agency head Fatih Birol warned oil supply disruptions from the Middle East would rise in April.

Higher oil prices matter directly for India, which is the world’s third-largest crude importer. Traders and economists flagged that sustained crude above $100 a barrel can add to inflation risks and complicate the interest-rate outlook. That mix pushed investors to demand higher yields, particularly in the 10-year segment.

10-year yield pushes higher again

The benchmark 6.48% 2035 bond yield was up about 4 basis points at 7.0734% by 11:15 a.m. IST on April 2, according to Reuters. That was its highest level since May 21, 2024, after it ended the prior session at 7.0345%. The move kept the market on track for a twelfth straight rise in the 10-year yield.

The March move set the tone for this weakness. Reuters reported that the 10-year yield rose 37 basis points in March and 45 basis points in fiscal 2026, despite 100 basis points of rate cuts by the Reserve Bank of India (RBI). The combination of oil-led inflation concerns and heavy bond supply kept risk premium elevated.

Oil above $100 adds to inflation-rate worries

HSBC economists said oil above $100 per barrel could push inflation beyond 6% and trigger rate hikes in India. That assessment shaped trading, with one primary-dealer trader quoted by Reuters saying the market was pricing in rate hikes in 2026 for now, but expectations could ease if the war situation cools.

This matters because India has retained its inflation target of 4% over the next five-year period, and a rise in energy costs can spill into broader prices. Oil also affects India’s current account through the import bill, adding another channel of macro pressure when crude stays elevated.

Debt supply returns in FY27, starting with a key auction

Bond traders also trimmed positions ahead of the day’s central government auction. Reuters said New Delhi planned to sell 290 billion rupees of bonds later on April 2, the opening auction for its 8.20 trillion-rupee borrowing programme for the first half of the fiscal year.

Supply risk was not limited to the centre. In late March, state government borrowing plans added to the supply overhang. Reuters reported states aimed to raise 574 billion rupees via bond sales on March 24, described as the highest quantum for that financial year, while another report referenced states looking to raise 429.4 billion rupees in the coming days after raising a record 12.31 trillion rupees during the financial year.

Fuel excise duty cuts added a fiscal layer

Beyond oil, the bond market also reacted to fiscal signals. Reuters reported that New Delhi reduced the special excise tax on petrol from 13 rupees to 3 rupees a litre, and cut the duty on diesel to zero from 10 rupees. Economists cited in that report estimated the impact of these duty reductions at $15.91 billion to $16.97 billion for fiscal year 2027.

The concern in fixed income is that lower fuel levies can worsen the fiscal arithmetic if not offset elsewhere, potentially increasing borrowing needs. The same Reuters report said the benchmark 6.48% 2035 bond yield was at 6.9256% at 10:40 a.m. IST on the day of those tax-cut headlines, after closing at 6.8750% in the previous session.

Swaps reflect a repricing in rate expectations

The move in cash bonds was echoed in derivatives. Reuters reported that India’s overnight index swaps (OIS) edged higher as rising domestic and US yields unwound earlier receiving interest. On April 2, the one-year OIS rate rose 5.5 basis points to 6.3%, the two-year rate hovered about 4 basis points higher at 6.52%, and the five-year swap rate was around 6.8050%, up 1.5 basis points.

Earlier in the period of oil-led volatility, Reuters also reported levels such as a one-year OIS at 5.97%, two-year at 6.17%, and five-year at 6.52% (March 24 close). The direction across these snapshots was consistent with the market demanding more compensation for inflation and policy uncertainty.

RBI policy and liquidity in focus

The RBI’s rate-setting panel was scheduled to meet the following week, with a decision due on April 8, Reuters said. Traders were weighing the risk that a crude-driven inflation impulse could shift the policy conversation, even after cumulative rate cuts.

Liquidity conditions and the central bank’s market operations were also part of the story. One report said the RBI bought bonds worth 1 trillion rupees via open market operations and 572 billion rupees through the secondary market since the Middle East war started, largely to cushion liquidity effects tied to FX market intervention as the rupee traded close to record lows.

Market impact: what investors were reacting to

The immediate driver across these sessions was oil. Reuters cited Brent around $107 a barrel on April 2, while another market report referenced Brent around $112 per barrel on March 23 and noted prices had risen about 50% since the war broke out in late February. With oil holding above $100 in multiple updates, investors priced higher inflation risk and a higher-for-longer rate path.

The second driver was supply. The central government’s 8.20 trillion-rupee first-half borrowing plan begins with a 290 billion-rupee auction, while state bond sales in late March were described as unusually large. When both centre and states bring heavy issuance, yields can rise unless demand expands at the same pace.

The third driver was fiscal uncertainty after fuel tax cuts, which investors linked to a weaker fiscal outlook. Combined, these factors translated into a persistent rise in yields and higher swap rates.

Key numbers to track

Conclusion

India’s bond market started the new fiscal year under pressure as war-related oil shocks pushed crude above $100 and lifted inflation concerns. With a 290 billion-rupee auction kicking off the government’s 8.20 trillion-rupee first-half borrowing plan, traders stayed cautious and yields climbed to levels last seen in 2024. The next key domestic trigger is the RBI policy decision due on April 8, as investors watch how the central bank balances inflation risks against growth and liquidity conditions.