Bond Yields Unlikely to Surge Significantly Despite Further Rate Hikes: Economists

India’s benchmark 10-year government bond yield is expected to remain relatively stable even if the Reserve Bank of India (RBI) implements further repo rate hikes. According to a survey of economists and treasury heads, the benchmark yield is unlikely to rise significantly from current levels, with a median estimate suggesting yields will hover around 7.6 per cent by the end of fiscal year 2027.

The benchmark 10-year government bond yield was recently trading near 7.4 per cent. Market participants note that a large portion of expected future monetary tightening—including potential rate hikes up to 75 basis points—has already been factored into bond market pricing. The RBI's October monetary policy indicated that the path ahead involves either rate hikes or an extended pause, effectively ruling out near-term rate cuts.

Despite ongoing inflation concerns, economists point to several countervailing factors that should cushion the impact of higher policy rates. These include slower economic growth, a moderation in private-sector credit demand, and abundant system liquidity in the banking sector.

Indranil Pan, Chief Economist at YES Bank, noted that higher interest rates would likely sober economic growth and reduce the credit needs of industry. Consequently, excess funds in the banking sector would gradually flow into the government securities market. Pan expects the 10-year yield to settle around 7.35 per cent.

Treasury officials have expressed similar views regarding market stability. Gopal Tripathy, Head of Treasury at Jana Small Finance Bank, stated that yields are not expected to exceed 7.6 per cent, adding that a range between 7.50 per cent and 7.60 per cent presents a favorable buying opportunity.

This benign outlook suggests that government borrowing costs may not increase materially. Since sovereign borrowing rates track government securities, stable yields can help contain financing costs for the Centre. Anitha Rangan, Chief Economist at RBL Bank, observed that government capital expenditure has continued to rise despite elevated interest rates, indicating that a repo rate reaching 6.50 per cent does not necessarily impede government spending.

However, differing projections remain among market experts. Madan Sabnavis, Chief Economist at Bank of Baroda, expects the benchmark yield to stay within the 7.35 to 7.45 per cent range, though a consumer inflation print exceeding 6 per cent could trigger an upward push if markets price in additional hikes. Additionally, Rajeev Pawar, Head of Treasury at Ujjivan Small Finance Bank, projects the 10-year yield could touch 7.75 per cent due to higher government borrowing linked to drought-relief spending and increased state borrowings.

Despite these variables, consensus suggests that yields will not sustain levels significantly above current estimates, as higher crude oil prices and anticipated policy tightening are already reflected in the market.

"The stabilization of bond yields despite anticipated policy rate hikes indicates a mature and forward-looking debt market where future tightening is largely factored in. For businesses, founders, and growing enterprises, this containment in sovereign borrowing costs is a positive indicator, as it helps stabilize broader interest rates and credit availability across the financial ecosystem without triggering sharp spikes in capital expenditure costs." — Dr. Shishir Gupta, Founder & CEO, StartupLanes