The US-Iran war's economic impact turned out smaller than many feared. An interim peace deal improved the outlook even further. Lower oil prices have already pushed down short-term bond yields. That makes investors less worried about a rate hike from the Reserve Bank of India.
Oil now sits at 70.91, down 2.43% in recent trading.
The front end of the bond curve - shorter-term bonds - has already rallied. "The front-end has already rallied sharply on lower oil prices over the past few weeks and the pricing out of RBI rate hike expectations," wrote Goldman analysts including Danny Suwanapruti in a note. The investment bank favors the longest-dated securities because a growing volume of such bonds is now available through the fully accessible route.
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India removed a tax on foreign purchases of debt and widened the set of bonds that can be bought for index inclusion. That sparked a surge in foreign buying. The bond index story is the big driver. Goldman analysts called the inclusion "a question of timing rather than direction, with a mid-year announcement likely." That means the money is coming - it is just a matter of when.
The backdrop for this bond rally is a dramatic shift in global oil dynamics. Before the US-Iran conflict, crude prices had spiked above $80 per barrel, fueling concerns that India's import-dependent economy would face both higher inflation and a wider fiscal deficit. The government's subsidy burden on fuel and fertilizers was expected to balloon.
But the peace deal and a subsequent glut in supply have reversed that trajectory. Brent crude has fallen roughly 12% from its war-time peak, giving the Reserve Bank of India room to hold rates steady or even consider easing later this year. Lower oil also helps India's current account deficit, which had widened to 2.1% of GDP in the previous quarter.
For bond investors, this combination of easing price pressures and stable monetary policy makes long-duration debt particularly attractive, as it locks in relatively high yields before further declines.
India's potential addition to the Bloomberg Global Aggregate Index is a key factor that continues to drive foreign investor appetite. Analysts estimate that passive inflows of roughly $15 billion could follow over the phase-in period once the index addition is formally announced, likely in the middle of the year. Combined with the recent tax removal and the relaxation of purchase restrictions, India's bond market is drawing sustained interest from global funds seeking higher yields in a low-rate world.
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