India 10Y Yield Eases From Two-Year High

India’s 10-year government bond yield rose to 7.18%, rebounding slightly after falling to its lowest level in over a month, as investors booked profits following a sharp rally in debt prices. Persistent domestic inflation could limit the Reserve Bank of India's scope to cut interest rates, while substantial government borrowing needs add to government bond supply and keep yields elevated. Additionally, tighter banking-system liquidity following the RBI's withdrawal of surplus funds could constrain banks' capacity to expand government bond holdings. Higher US Treasury yields could divert foreign investment away from Indian debt, while net selling of government securities in September and October may further constrain demand. On the other hand, crude oil prices fell nearly 17% last week, easing imported inflation risks and pressure on India's external balance and government finances, potentially giving the RBI greater room to cut rates and putting downward pressure on yields.

India’s 10-year government bond yield fell to 7.12%, extending its decline to its lowest level since late September, as easing crude oil prices and softer US Treasury yields offered relief to local debt markets. Brent crude pulled back to below USD 100 per barrel amid hopes for a resolution to the US-Iran conflict, easing concerns over imported inflation, current-account and fiscal pressures, while moderating expectations of further Reserve Bank of India rate hikes. Lower US Treasury yields also improved the relative appeal of Indian government securities. However, Middle Eastern supply risks continue to leave India vulnerable to energy price fluctuations given its reliance on imported energy. Persistent foreign investor outflows from government bonds and substantial government borrowing needs may also constrain bond demand. At the same time, persistent domestic inflation could limit the scope for monetary easing and keep borrowing costs elevated.

India's 10-year government bond yield stood at 7.47%, remaining near its highest level since March 2023 as high oil prices and expectations of further monetary tightening weighed on bonds. Brent crude remained elevated at around USD 115.50 a barrel after an attack on a Saudi refinery revived Middle East supply concerns, keeping inflation risks high for India, which imports nearly 90% of its oil needs. Additionally, persistently high energy costs could strain public finances and worsen the country's external balance. At the same time, the US 10-year Treasury yield rose above 5%, narrowing the yield premium on Indian debt and reducing its relative appeal. Domestic rate expectations have also hardened, with markets pricing in nearly 125 basis points of hikes over the next 12 months. Tighter domestic liquidity has added to selling pressure on government bonds. Investors now await Wednesday's Federal Reserve decision for signals on the US rate outlook and global bond yields.