MUMBAI - Indian government bonds dropped to over two-month lows and the rupee snapped a seven-day winning streak on Monday, following a surge in global crude oil prices which clouded the outlook for further interest rate cuts by the Reserve Bank of India.
Indian stock markets also fell sharply as oil prices jumped nearly 20% following attacks on Saudi Arabia's oil facilities.
The country's benchmark 10-year bond yield was trading at 6.71% at 0515 GMT, after hitting 6.75% earlier, its highest level since July 5. It had closed at 6.64% on Friday.
The partially convertible rupee was at 71.55/56 per dollar versus its previous close of 70.92. The rupee weakened to as much as 71.6950 in opening deals.
"Looking at crude, the market has toned down its expectations of a rate cut. Yields may remain at the higher-end of the recent range for the time being," a senior debt trader at a private bank said.
India on Saturday announced a series of measures to revive the housing sector and boost exports as the government tries to kick-start an economy hit by a lending crisis and a slowdown in demand.
However, the steps failed to cheer investors as fears of a soaring oil import bill and a spike in inflation pushed most stocks into the red.
The broader NSE index fell as much as 0.79% to 10,988.85, while the benchmark BSE index .BSESN slipped 0.73% to 37,112.79.
"While the steps are a move in the right direction, we do not expect a material change in the near-term growth outlook," economists at Morgan Stanley said in a note.
Some traders, however, said the government's decision to refrain from any fiscal slippage was a positive and would continue to provide room for more rate cuts.
A Reuters poll conducted after the last monetary policy decision in August predicted the RBI would cut rates by another 25 basis points at its October review and then by 15 basis points early next year.
"RBI will cut some more, even if their job has become admittedly more difficult. The rupee would have to go past 74 for the RBI to get spooked," Taimur Baig, chief economist and managing director and at DBS Bank in Singapore, told the Reuters Global Markets Forum on Monday.
(Reporting by Swati Bhat; Editing by Kim Coghill) ((firstname.lastname@example.org; twitter.com/swatibhat22; +91-22-68414381; Reuters Messaging: email@example.com))