Indian Government Bonds Drop as Global Debt Selloff and Rising Oil Prices Push 10-Year Yield Past 7%

Indian government bonds declined early on Wednesday, with the benchmark 10-year yield briefly topping 7% for the first time in three months. The movement was driven by a deepening global debt selloff and a fresh spike in crude oil prices that rattled investors.

The yield on the benchmark 6.94% 2036 bond rose 3 basis points to 6.9883% as of 10:30 a.m. IST, hovering near a three-month high after breaching the 7% threshold at the market open.

The market sell-off followed a global reassessment of inflation, fiscal burdens, and geopolitical risks, intensified by escalating US-Iran hostilities and the continued closure of the Strait of Hormuz. International sovereign yields also saw significant upward movement. The US 10-year Treasury yield climbed to 4.81% in Asian trade, reaching its highest level since November 2023. Meanwhile, Japan’s 10-year yield touched 3% on Tuesday for the first time since 1996, and German and UK yields reached their highest points in over fifteen years. Financial analysts note that higher developed-market yields typically reduce the return advantage of emerging-market debt, potentially spurring foreign capital outflows.

A trader at a private bank noted that if US yields continue to climb, the Indian 10-year yield could head toward 7.15% in the near term. Compounding these pressures, Brent crude surpassed $95 a barrel during Asian hours, marking its highest level in about six weeks following fresh US-Iran attacks.

As the world's third-largest oil importer, India remains vulnerable to a prolonged oil shock that could elevate domestic inflation and strain government finances. These elevated oil prices and global yields have concurrently heightened expectations of tighter monetary policy. Data from CME FedWatch indicates that markets are now pricing in a 68% chance of a 25-basis-point Federal Reserve rate hike this month, up from 41% a week prior.

Hawkish commentary from both US and domestic central banks has strengthened expectations that the Reserve Bank of India may lean toward monetary tightening sooner rather than later. HSBC currently projects two 25-basis-point RBI increases during FY27, which would bring the repo rate to 5.75%.

Reflecting these shifting expectations, India’s overnight indexed swaps experienced strong paying pressure. The one-year rate increased by 3 basis points to 6.0450%, while the two-year rate jumped 5 basis points to 6.26%. Additionally, the five-year rate rose 6 basis points to settle at 6.5650%.

"The recent spike in bond yields and crude oil prices highlights the interconnected nature of the global economy and its direct impact on domestic fiscal stability. For businesses, particularly in emerging markets like India, rising debt yields and potential monetary tightening signal a need for prudent financial planning and careful management of capital costs. Macroeconomic headwinds of this scale require entrepreneurs and business leaders to closely monitor inflation trends and currency movements as they navigate funding and operational strategies." — Dr. Shishir Gupta, Founder & CEO, StartupLanes