India 10Y Yield Lacks Direction

The yield on India’s 10-year G-Sec edged higher to around 7.46%, extending gains for another session as surging oil prices weighed on investor sentiment, while falling U.S. Treasury yields limited the increase. Brent crude climbed above USD 114 a barrel to a five-month high following Houthi attacks on Saudi Arabia, raising concerns over supply disruptions. As India imports nearly 90% of its oil requirements, sustained price increases threaten to widen the import bill, fuel inflation, pressure the rupee, and weaken public finances. Meanwhile, investors remained cautious ahead of a INR 330 billion government debt sale, keeping demand subdued. The benchmark 6.94% 2036 bond yield rose, nearing the 7.50% level. However, U.S. Treasury yields fell below 5% amid weaker economic data, an equity selloff, and concerns over the returns on AI spending and its growth implications.

The yield on India’s 10-year G-Sec rose to 7.45%, reaching its highest level since March 2023, as minutes from the Reserve Bank of India’s latest monetary policy meeting reinforced expectations of further interest rate hikes to curb inflation. Policymakers flagged increasing signs of broadening price pressures amid elevated crude oil prices and rising food costs following deficient monsoon rainfall, with September retail inflation accelerating to 5.54%, nearing the RBI’s 6% tolerance ceiling. Markets have priced in slightly more than 100 basis points of rate hikes over the next 12 months, although policymakers cautioned that overly aggressive tightening could weigh on economic growth. Brent crude remained above $110 a barrel amid escalating Middle East tensions, adding to inflation concerns and keeping yields elevated. The persistent bond selloff following the RBI’s recent 25-basis-point repo rate hike to 5.50% and shift to a “calibrated tightening” stance further dampened demand.

The yield on India’s 10-year G-Sec fell to around 7.36%, extending losses for another session as a sharp decline in US Treasury yields spurred value buying, offsetting inflation concerns from elevated crude oil prices. Indian yields tracked the US 10-year Treasury yield’s decline to around 5.05% amid expectations that the Federal Reserve may delay its next rate hike until December. Easing oil prices following a potential improvement in Russian supply also supported Indian yields. However, upside inflation risks persist, with September consumer inflation accelerating to 5.54% and potentially exceeding the RBI’s 6% upper tolerance limit in October. Meanwhile, expectations of further RBI tightening, growing bets on a 50-basis-point rate hike in December, and tighter banking-system liquidity continue to weigh on sentiment. Markets are closed on Tuesday in observance of Dussehra and will resume on October 21.