India’s 10-Year Bond Yield Seen Surpassing 7.6% for 3-Year High

India started exploring a rupee settlement mechanism with Russia soon after the invasion of Ukraine. Photo: Reuters

The yield on India’s benchmark 10-year government bond may surpass a three-year high of 7.62% in the coming months amid rising interest rates and more government borrowing, analysts say.

The 10-year benchmark bond yield ended at 7.35% on Monday, having risen by 19 basis points in the two trading sessions since the Reserve Bank of India raised its key lending rate, or repo rate, by 50 basis points to 5.4% on Friday.

“We expect the central bank to hike policy rate by 60 basis points by December, meaning the 10-year bond yield may test 7.60% levels in coming months,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

The yield, which was at 7.11% just before the policy move, had hit 7.62% in June. Indian markets are shut on Tuesday for a local holiday.

Rein in Inflation

The latest rate hike was the RBI’s third in the current cycle to rein in inflation that has stayed above its tolerance band for six straight months.

RBI Governor Shaktikanta Das also highlighted concerns over elevated inflation and maintained its inflation forecast at 6.7% for the current financial year.

India‘s retail inflation data for July is due on Aug. 12 and even though market participants expect inflation to ease, the reading is expected to stay above the upper tolerance level of the RBI for next few months. The RBI targets inflation at 4.00% with a tolerance band of 200 basis points on either side.

“With focus on inflation, it is clear that more rate hikes are on the cards, and any positive move would come in only from global factors like U.S. treasury yield or oil prices,” said Vijay Sharma, senior executive vice president at PNB Gilts.

India aims to gross borrow a record 14.31 trillion rupees ($179.74 billion) through sale of bonds in the current financial year to meet fiscal deficit target of 6.4%.

“We continue to believe that centre may have to resort to extra borrowing even if budgeted fiscal deficit is met. On top of all this, we consider the 10-year segment mispriced as it trades purely as a sentiment product,” ICICI’s Upadhyay added.

Reuters, with additional editing from Alfie Habershon

Bond Market Volumes Drop as Asia Firms Turn to Bank Loans

Indian Rupee Seen Testing Historic Low in Coming Months

Alfie Habershon

Alfie is a Reporter at Asia Financial. He previously lived in Mumbai reporting on India's economy and healthcare for data journalism initiative IndiaSpend, as well as having worked for London based Tortoise Media.