Chennai: Experts caution that prolonged tensions between Iran and Israel may lead to an increase in Indian government borrowing costs, driven by potential spikes in global crude oil prices. On April 15, experts voiced concerns that a prolonged conflict could push the 10-year benchmark bond yield beyond the 7.20 percent mark in the near future.
“The rising tension between Iran and Israel has thrown this region into a deeper crisis. The unabated geopolitical tensions will cause crude prices to rise and that will be a big worry for us,” stated V Ramachandra Reddy, Head of Treasury at The Karur Vysya Bank.
However, experts noted that a decline in domestic inflation could mitigate the impact on government bond yields. Recent data released by the Ministry of Statistics and Programme Implementation revealed that India’s headline retail inflation rate dropped to a 10-month low of 4.85 percent in March, down from 5.09 percent in February, marking the lowest rate since May 2023.
Mataprasad Pandey, Vice President at Arete Capital Service, warned that if US treasury yields and Brent crude oil prices continue to rise, the 10-year government securities yield may breach the 7.20 percent level.
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Iran-Israel Conflict
The situation escalated on April 13 when Iran launched over 300 drones and missiles at Israel in retaliation for an alleged strike on its consulate in Syria. Tel Aviv vowed to retaliate and urged for tighter sanctions against Tehran. US President Joe Biden reaffirmed America’s commitment to Israel’s security, emphasizing an “ironclad” support against threats from Iran and its proxies.
Impact on MPC’s Inflation Battle
The Middle East turmoil poses a threat to India’s inflation trajectory, particularly if oil prices surge towards $100 a barrel. India heavily relies on imported oil, with over 85 percent of its requirements sourced from other nations. Rising commodity prices, especially fuel, could disrupt the global deflation trajectory, influencing India’s inflation outlook.
Moreover, rising bond yields may increase borrowing costs for the government. The government is set to borrow Rs 7.50 lakh crore in the first half of the current fiscal year, representing over 50 percent of the full-year borrowing estimate. The surge in yield on government securities, particularly the 10-year benchmark bonds, over the past two weeks underscores the impact of global uncertainties on India’s financial markets.
