brent crude was sitting at $60 to $67 before the US-Israel strikes on Iran in early March. after the Strait of Hormuz got disrupted it surged to $120. it has since pulled back to the $80 to $110 range but the damage to sentiment is done.
for India specifically: we import over 85% of our crude and more than half comes from the Middle East. every $10 rise in oil adds roughly 0.35 to 0.4% to domestic inflation. FPIs pulled Rs 21,000 crore from Indian markets in just the first week of March. 10-year G-Sec yield crossed 7% by March 30.
what is the actual playbook for a retail bond investor in this environment?
The transmission channel from oil to bonds is worth spelling out clearly.
Higher crude raises import costs for India. This widens the current account deficit and puts downward pressure on the rupee. A weaker rupee makes imports even more expensive, adding to inflation. Higher inflation reduces the probability of rate cuts or raises the possibility of rate hikes. Bond investors price in this scenario by demanding higher yields, which means bond prices fall.
This is precisely the chain that played out in March. The OIS market moved sharply, with the one-year tenor reaching 5.72% and the five-year at 6.75%. That is pricing in a materially tighter outlook than where we were a month ago.