India 10-Year Yield Softens Amid Oil and FX Pressures

The yield on India’s 10-year G-Sec hovered around 7.2%, pausing gains after reaching two-year highs as investors braced for a potentially hawkish Reserve Bank of India policy decision, with nearly 60% of economists expecting a 25-basis-point rate hike. Traders are also awaiting guidance on the future pace of tightening and measures to absorb surplus banking-system liquidity, including a possible increase in banks’ cash reserve ratio or further bond sales. The RBI sold INR 1 trillion of government bonds in September, its largest sale in more than a decade, while rising overnight indexed swap rates signalled expectations of further policy tightening. The benchmark 6.94% 2036 bond yield has risen for seven consecutive weeks, gaining a cumulative 45 basis points, its longest such streak in more than a year.

The yield on India’s 10-year G-Sec rose to around 7.21%, reaching more than two-year highs as elevated US Treasury yields and expectations of a tighter RBI policy weighed on sentiment ahead of next week’s policy decision. The benchmark 6.94% 2036 bond yield closed at 7.19% on Wednesday, a two-and-a-half-year high, after rising 24 bps in September and 44 bps in the third quarter. The US 10-year Treasury yield climbed to 5.30%, its highest since 2007, while traders remained cautious ahead of an INR 330 billion debt sale. Meanwhile, markets are pricing in nearly 100 bps of RBI tightening over the next 12 months, with the one-year overnight indexed swap rate rising 21 bps in September to 6.21%. The RBI’s efforts to drain surplus liquidity following record $133 billion FCNR(B) inflows have further pressured yields, while the government’s plan to borrow nearly INR 8 trillion through March adds to supply concerns. Debt markets will be closed on Friday, with trading resuming on October 5.

The yield on India’s 10-year G-Sec fell to around 7.15%, retreating from more than two-year highs as softer crude prices and reduced expectations of another US Federal Reserve rate hike eased pressure on yields. Crude prices retreated from recent highs as energy flows from West Asia showed signs of normalising, although Brent remained above $100 a barrel. The decline in yields came despite persistent concerns over elevated global yields and oil prices, which have driven a risk-off move in emerging-market debt and contributed to INR 102 billion ($1.06 billion) of foreign outflows from India’s FAR-eligible bonds so far in September, the biggest monthly outflow of FY27. Rising expectations of RBI tightening have also weighed on demand for Indian government bonds.