India’s benchmark 10-year government bond yield has climbed to its highest level in more than three years, and traders say the rise may not be over. Costly crude oil, a steady flow of new government debt, tight cash in the banking system and talk of further interest rate increases are all pushing yields up.
The 10-year yield ended Friday at 7.47%, the highest since March 2023. It has risen 78 basis points in the past four months. That puts it close to the 7.61% peak reached during the last rate-hike cycle.
Some market participants now expect it to go higher still. Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank, said the market is dealing with heavy bond supply, draining liquidity and rising crude prices at the same time. “I expect the 10-year yield to touch 7.75% by December,” he said. He also pointed out that the gap between Indian and US interest rates supports higher yields in India.
Oil is the biggest worry
Bankers described the selloff as a mix of global and domestic pressures, with crude oil the largest risk for bond investors. Brent crude futures rose to $116.72 a barrel, the highest since April, according to Reuters data.
India buys most of its crude oil from abroad, so a sharp climb in prices raises concerns about both inflation and the current account deficit. Higher inflation tends to push bond yields up because investors demand more return to compensate.
Treasury dealers said the market had earlier assumed that disruptions linked to the US-Iran conflict would be short-lived. That view is now giving way to a fear that oil could stay expensive through the end of the year. In that case, inflation risks would remain and any real fall in bond yields would be pushed back.
Foreign investors pulling out
Foreign portfolio investors have also been selling Indian debt. They have sold ₹20,772 crore so far this fiscal year, according to NSDL data. This adds to the pressure on bond prices, which move in the opposite direction to yields.
A global problem
The trend is not limited to India. Tanuj Khosla, managing director at InCred Global Asset Management, said there seemed to be little relief for bond yields unless crude prices cool. “This is not just a local story,” he said. “It is an oil and treasury shock spreading across emerging markets.”
What it means for borrowers and investors
Government bond yields are a reference point for borrowing costs across the economy. When they rise, companies and banks generally face higher costs for raising money. Investors already holding bonds see the market value of their holdings fall as yields climb.
For now, the direction of crude oil prices looks set to be the main factor. If oil eases, yields could get some relief. If it stays high, traders expect the pressure on the bond market to continue towards the December levels some of them are forecasting.