A weaker rupee makes imports costlier, feeding directly into domestic inflation. (File Photo)
India’s benchmark 10-year bond yield on Friday shot up by 6 basis points to 6.93 per cent from the previous day’s close of 6.87 per cent, raising concern over the possibility of a rise in inflation and monetary policy tightening by the Reserve Bank of India.
High Brent crude prices of over $ 100 per barrel intensified inflationary fears, while the rupee’s slide below 94 level against the dollar compounded pressure on the country’s fiscal and external balances amid the backdrop of ongoing conflict in the Middle East, which has rattled global markets and heightened risk aversion.
With Friday’s rise, bond yield has risen by 26 basis points in the last one month. Bond prices and yields move in opposite directions — when prices rise, yields fall and vice-versa.
On the other hand, benchmark bond yield in the US has risen by 48 basis points to 4.42 per cent in the last one month. In Japan, the five-year yield rose 3 basis points to a record high of 1.770 per cent, while the benchmark 10-year yield rose 3 bps to 2.300 per cent.
The rise in yields in the last couple of days signals a swift repricing of risk by investors, who are now demanding higher returns to compensate for mounting uncertainties. Elevated crude prices threaten to widen India’s current account deficit and strain public finances through higher import bills and potential subsidy burdens. If oil rises further, yield can even cross the 7 per cent mark in the coming days, analysts said.
At the same time, a weaker rupee makes imports costlier, feeding directly into domestic inflation. A sharp rise in bond yields typically means investors can expect higher inflation and the RBI is likely to raise interest rates.
Analysts said the bond market’s reaction reflects deep concern over the inflation trajectory and the possible policy response from the RBI. Higher inflation expectations typically push yields upward, as investors anticipate tighter monetary conditions or prolonged policy rigidity. The RBI kept the main policy instrument – Repo rate – unchanged at 5.25 per cent and hiked the GDP forecast to 7.4 per cent from an earlier estimate of 7.3 per cent in the February 2026 policy review. It also revised upward the projection for consumer price index (CPI) inflation to 2.1 per cent from 2 per cent.
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The RBI is likely to keep the Repo rate unchanged in the forthcoming policy review in April and watch the inflation trajectory. The US Federal Reserve had kept the rates unchanged at 3.50-3.75 in its meeting on March 18.
While the pump prices of petrol and diesel have been held steady by the government, the sharp increase in the crude oil prices will soon impact the economy which is driven by petrochemicals and their intermediates across the entire supply chain of manufacturing and logistics. “Inflation is expected to rise on a low base of previous quarters on the back of expensive raw materials which may compel the RBI to start increasing rates sooner than the market’s expectations,” said Phanisekhar Ponangi, Co- Founder and head of Investments, Mavenark.
Moreover, the rising trade deficit on the back of expensive crude imports and reduced remittances from West Asia are likely to exert a downward pressure on the rupee. “The RBI will be mindful of proactively addressing inflationary pressures before it leads to a wage-price spiral which can be extremely challenging to manage,” Ponangi said.
The surge in yields is not an isolated move but a sharp adjustment to a rapidly deteriorating macroeconomic environment. Investors are recalibrating their positions in the wake of rising external risks, currency fragility and the inflationary impact of expensive energy. Unless there is a meaningful easing in crude prices or stabilization in the rupee, upward pressure on bond yields is likely to persist.
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The market is indicating the fear of economic disruption which can range from a few months to a few years. As the war drags on longer, the risk of damage to critical oil infrastructure rises manifold along with multi-faceted escalatory actions being resorted to by both sides. What started as a short-term price risk for oil is quickly turning into long-term supply risk which is spooking the markets.
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