MUMBAI: Indian government bond yields may rise in early trading on Monday amid worries that geopolitical tensions in the Middle East may impact oil prices and inflation outlook.

The yield on the benchmark 10-year is likely to trend in a 7.16%-7.21% range after closing at 7.1794% in the previous session on Friday, a trader with a private bank said.

“An escalation of geopolitical tensions means rise in input costs from higher crude and commodities prices, increasing trade barriers and in turn higher inflation,” said Anitha Rangan, an economist at Equirus Group.

“So, the return of 2 US inflation target may have to be revised and markets should brace for higher interest rates, higher volatility and higher risk premiums.”

Oil prices rose on Friday due to heightened tensions in the Middle East, which could risk disruptions to supply from the oil producing region.

The prices, however, eased in Asian trade on Monday. Higher commodity prices could impact domestic retail inflation.

India’s annual retail inflation rate eased in March to a five-month low of 4.85%, helped by a drop in fuel prices but economists say a rate cut by the central bank is still some months away as food prices remain sticky.

Equirus Group’s Rangan does not expect the Reserve Bank of India to cut its benchmark rate in 2024.

India’s central bank kept its repo rate on hold at 6.50% for a seventh straight policy meeting earlier in April as growth is expected to remain robust while inflation stays above the 4% target.

Relentless spike in US yields turns India bond traders more cautious

Meanwhile, US Treasury yields eased on Friday but remained around key level of 4.50% as Middle East tensions spurred safe-haven buying.

The US yields were higher in Asian trade on Monday. Market participants have readjusted their rate cut-expectations from the Federal Reserve after an elevated US inflation reading last week.