Indian Bond Yields Rise To 20-Month High Amid Falling Rupee And Growing Concerns Over Inflation Outlook

India’s benchmark 10-year bond yield jumped by 6 basis points on March 27 to the highest level seen in over 20 months. Investors are concerned about the growing risks of rising inflation due to a surge in crude oil prices, and thus re-pricing the possibility of a monetary policy tightening.

The 10-year benchmark government bond (G-sec) yield stood at 6.93 per cent on March 27, jumping to a high of 6.96 per cent during the day, triggered by a fresh record fall for the rupee. The Indian rupee, the worst-performing Asian currency, has fallen over 4 per cent since the Iran war began, and is currently hovering near 94.85 to a US dollar. The fall in the domestic currency, coupled with over a 40 per cent surge in crude oil prices, added to concerns of India’s import bill rising and its possible impact on the country’s current account deficit (CAD). Crude oil prices have risen persistently above the $100 mark amid the Iran war, and energy supply remains restricted through the Strait of Hormuz, which controls nearly 20 per cent of the global energy supply. This has, in turn, led to concerns about the impact of imported inflation on the domestic economy.

In March alone, the 10-year G-sec yield has risen by 26 bps. Compared to this, the US benchmark 10-year treasury yield has risen 48 bps, while Japan’s 10-year yield has risen by 3 bps. US yields also rose after the Federal Reserve chose to maintain a status quo on interest rates, triggering concerns about higher rates globally if crude oil prices continue to rise.

The Reserve Bank of India (RBI) will announce its monetary policy decision on April 9, where investors largely expect a status quo on rates. Investors are, however, waiting for the decision on the policy stance and the commentary of the panel on inflation and global energy prices. Investors fear that if the war is prolonged and the crude oil prices continue to remain elevated, then the RBI might choose to raise interest rates later in the year, which would push up yields.

Another reason for the rise in borrowing rates is the continued depletion of rupee liquidity in the wake of rupee volatility. The RBI has been intervening in the foreign exchange market with dollar sales to limit the volatility in the rupee. However, with the depletion in dollar reserves, forex reserves dropped to $698.346 billion, depleting $11.413 billion worth of reserves during the week ended March 20. This, in turn, has added to pressures for the rupee and further led to a rise in yields.

Market reports suggest that the reaction in the bond market reflects a deep concern over the possible interest rate trajectory in relation to inflation. Additionally, the upcoming financial year 2026-27 has a higher bond supply, with the government aiming to borrow Rs. 8.2 lakh crore alone in the first half, around 51 per cent of the targeted gross borrowing. This further dampened investor interest in bonds.