India-US 10-Year Bond Yield Spread Widens Past 250 Basis Points as G-Sec Hits 7.48%

India’s benchmark 10-year government bond yield rose to 7.48%, pushing the spread over the US 10-year Treasury yield to around 251 basis points. This marks the highest level for the India-US yield gap in four months.

With the US 10-year Treasury yielding about 4.96% to 4.97%, the differential has moved above the 250 basis points (bps) mark. While bond market participants note that this enhances the relative attractiveness of Indian debt, it may not be sufficient on its own to attract sustained foreign portfolio inflows.

Historically, the differential has fluctuated. In June 2026, the gap was around 250 bps, with the US Treasury hovering near 4.5% and the Indian G-Sec trading between 6.90% and 7.00%. The spread exceeded 500 basis points during 2020-21 before narrowing sharply, and more recently compressed to nearly 160 bps in May 2025.

The current widening is driven largely by a sharp rise in Indian bond yields amid expectations of tighter monetary policy and concerns over global crude oil prices. Meanwhile, US Treasury yields have remained elevated due to persistent inflationary pressures and fiscal concerns.

Market participants caution against interpreting the wider spread as a direct signal of impending foreign buying. Venkatakrishnan Srinivasan, Director at Rockfort Fincap LLP, noted that foreign portfolio investors (FPIs) look for risk-adjusted returns, and the widening spread by itself is unlikely to trigger a meaningful revival in FPI inflows.

According to Srinivasan, a sustained return of foreign buying would require a stabilising rupee, lower hedging costs, easing crude prices, and evidence that Indian yields offer attractive risk-adjusted returns. He added that investors should focus on actual purchases through the Fully Accessible Route (FAR) and movements in the rupee forward market rather than relying solely on the yield differential.

The logic is based on currency movements and hedging expenses. While a larger yield gap increases available carry for foreign investors, currency depreciation or higher hedging costs can significantly erode the additional yield. Analysts note that foreign investors assess effective returns after adjusting for these factors.

For the domestic bond market, moving above 7.45% is significant as it brings the benchmark yield closer to fair value under a scenario of one additional policy rate hike. Srinivasan expects the 10-year yield to remain within a broad 7.25% to 7.60% trading band, factoring in an anticipated 25 bps repo rate hike in December, with an immediate target of 7.50% before the market potentially becomes extremely volatile.

Foreign funds have sold more than Rs 3 lakh crore worth of Indian equities over the past 10 months and nearly Rs 5 lakh crore during calendar years 2025 and 2026. While the widening yield differential supports the investment case for Indian sovereign bonds, dealers believe it is unlikely to trigger a meaningful return of foreign capital to the debt market without currency stability, favourable hedging dynamics, and oil price moderation.

"The widening of the India-US bond yield gap to over 250 basis points highlights the shifting macroeconomic dynamics between emerging and developed markets. However, as industry experts rightly point out, headline yields do not tell the whole story. For businesses, entrepreneurs, and investors looking closely at capital flows, currency volatility, hedging costs, and global crude prices remain critical variables. Sustainable foreign capital inflows will depend heavily on overall macroeconomic stability rather than yield differentials alone." — Dr. Shishir Gupta, Founder & CEO, StartupLanes