Mumbai: India's benchmark 10-year government bond yield is headed toward levels last seen during the 2022-23 tightening cycle, with traders warning that elevated crude oil prices, persistent debt supply, tight banking-system liquidity and expectations of further monetary tightening could push yields to 7.75% by December. The benchmark 10-year yield settled at 7.47% on Friday, its highest level since March 2023.
The yield has surged 78 basis points over the past four months, almost nearing the 7.61% peak touched during the previous rate-hike cycle.
Bankers said the selloff is being driven by a combination of external and domestic factors, with crude oil emerging as the biggest risk for bond investors. Foreign portfolio investors (FPI) have sold ₹20,772 crore from Indian debt so far this fiscal year, NSDL data showed. "The rate differential between India and the US justifies higher yields. At a time when the market is struggling with heavy bond supply, liquidity is getting drained and crude oil prices are moving higher, I expect the 10-year yield to touch 7.75% by December," said Rajeev Pawar, head of treasury, Ujjivan Small Finance Bank.
Brent crude futures rose to $116.72 a barrel, their highest level since April, according to Reuters data. The sharp rise has raised concerns over inflation and the current account deficit as India imports bulk of its crude oil requirements.
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Treasury dealers said the market's earlier assumption that disruptions from the US-Iran conflict would be temporary has now given way to fears that elevated oil prices could persist through year-end, keeping inflation risks alive and delaying any meaningful decline in bond yields.
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"There seems to be little respite for bond yields unless crude prices cool. This is not just a local story. It is an oil and treasury shock spreading across emerging markets," said Tanuj Khosla, MD at InCred Global Asset Management.
