Bond markets crack, oil stays stubborn, and the rupee takes the hit

The mechanism here is one the macroeconomics unit calls the Fisher effect: when investors expect inflation to stay high, they demand a higher yield to compensate for the fact that the money they get back at the end of the bond's life will buy less. Oil prices have stayed elevated since the US-Iran conflict began, which keeps inflation expectations up, which keeps yields up. That is the chain. The sell-off is not one country's problem: because US Treasuries set the floor for global borrowing costs, a rise there pulls yields up in the UK, France and beyond, even when those countries' own inflation pictures are different.

France is the part I find most telling. The spread, the gap between what France and Germany pay to borrow over the same period, is a live market verdict on relative fiscal risk. At 127 basis points it is not yet at the 2012 peak of around 190, when Greece's near-default threatened to unravel the euro. But the direction matters as much as the level. Paris is proposing a mix of spending cuts and tax rises to close its deficit, and markets are not yet convinced it will work. The honest limit here is that spreads can widen for weeks before a government acts, or narrow quickly once it does: one day's data does not settle whether this is a slow drift or the start of something sharper.

The crude-versus-refined split is the key to understanding why prices are not falling even as Hormuz flows recover. Crude oil is the raw material; diesel is the finished product. Refining capacity, the industrial plant that turns crude into usable fuel, was damaged or disrupted during the conflict and has not fully come back. So the supply curve for refined diesel has shifted left, meaning less is available at every price, even though crude itself is flowing again. The price stays high not because of a shortage of oil in the ground but because of a bottleneck in the middle of the supply chain.

Trump's threatened diesel export ban is an instrument worth examining on its own terms. A ban would keep more diesel inside the US, pushing American pump prices down before the midterms. But it would reduce supply to Europe and Asia, pushing prices up there. The US exported roughly 1.2 million barrels of diesel per day before the conflict, so the volume is not trivial. Europe's request to release strategic reserves is the mirror image: releasing stored fuel adds supply to the market and pushes prices down, but it also depletes the buffer that exists for genuine emergencies. Both moves are short-term fixes that do not add a single barrel of new refining capacity, which is what the market actually needs.

India's position right now is a near-perfect illustration of what happens when a large external shock hits an open economy. The current account deficit, the gap between what a country earns from the rest of the world and what it spends, has widened because the oil import bill is large and rising. That deficit must be financed by capital coming in from abroad, either foreign direct investment or portfolio flows from institutional investors. When US Treasury yields rise sharply, those investors can earn more by simply holding American government bonds, so the incentive to take on the extra risk of Indian assets falls. Capital flows slow or reverse, the rupee weakens, and the import bill gets more expensive in rupee terms, widening the deficit further.

The FCNR inflows mentioned in the report are a specific cushion worth understanding. FCNR stands for foreign currency non-resident deposits: these are accounts held by the Indian diaspora in foreign currency at Indian banks, and they bring dollars into the system without the volatility of stock-market flows. They have helped stabilise the rupee in the short run. But the report's warning is that this support is temporary: once those deposits mature and are withdrawn, the underlying pressure from the trade deficit and from global yield differentials reasserts itself. Whether the RBI raises rates to attract more capital, or holds them to protect growth, is the decision that will define India's external stability over the next two quarters.

Trade negotiations between large economies almost always stall on the same two problems: one side's offensive interests, the things it wants to sell more of, clash directly with the other side's defensive interests, the industries it wants to protect. The US wants India to open its agricultural market, where Indian farmers are protected by high tariffs, and to ease restrictions on American digital companies. India wants lower US tariffs on its manufactured goods and easier visa rules for its service workers. Neither side can give ground on its most sensitive area without a domestic political cost. That is not a failure of diplomacy; it is the structure of the negotiation.

The 'not imminent' signal is worth reading carefully for what it does not say. Greer did not say talks had broken down; he said sticking points had been identified and were being worked on. In trade negotiation language, that is actually progress: you cannot solve a problem you have not named. The question is whether the political calendar on both sides creates pressure to close. India faces its own electoral cycle, and the US midterms in November mean the administration will want to show results on trade. If neither deadline forces a compromise, the deal could drift for another year. For an IB Economics extended essay, this is a clean real-world case of why the theory of comparative advantage, the idea that both countries gain from specialising and trading, does not automatically produce a deal.

Japan's situation is a good example of what the syllabus calls the difference between cost-push and demand-pull inflation. The rise to 2.7% in Tokyo is partly cost-push: the government had been subsidising energy bills, keeping prices artificially low, and as those subsidies expire, the true market price feeds through to consumers. That is not the same as an economy overheating because people are spending too much. The Bank of Japan's dilemma is that raising rates is the standard response to inflation, but if the inflation is mainly coming from subsidy withdrawal rather than excess demand, higher rates may slow the economy without fixing the underlying price pressure.

The global spillover is the part that connects this story to everything else in today's briefing. Japan is the world's largest creditor nation, meaning Japanese investors own more foreign assets than any other country's investors. For years, with rates near zero at home, they poured money into higher-yielding US and European bonds. That flow helped keep global yields lower than they would otherwise have been. A faster BoJ tightening cycle, meaning a quicker series of rate rises, reverses that flow. It is one more force pushing global bond yields up alongside the oil-inflation story and the US deficit fears. Whether the BoJ moves fast enough to matter, or cautiously enough to avoid a sharp reversal in Japanese markets, is the question that will run through the rest of 2026.