Indian Government Bonds Emerge as Top Asian Performers Amid Declining Oil Prices and US Treasury Yields

Indian government bonds recorded the strongest performance among emerging Asian peers this week, driven by a decline in global crude oil prices and US Treasury yields following a Democratic victory in the US midterm elections. The shift in global market sentiment helped ease pressure on the Indian rupee and prompted investors to scale back expectations of aggressive interest rate hikes by the Reserve Bank of India (RBI).

The benchmark 6.94% 2036 bond yield stood at 7.1973% at 11:40 a.m. IST, marking an increase of 2.5 basis points on the day but a decline of about 22 basis points for the week. This puts the benchmark on track for its best weekly performance since April. Meanwhile, the US 10-year Treasury yield dropped by approximately 10 basis points during the week, increasing the appeal of higher-yielding Indian debt instruments.

Foreign investors returned to the domestic debt market, purchasing nearly ₹5,200 crore worth of bonds in their largest weekly net purchase since July. Rohit Agarwal, co-founder of Dubai-based multi-family office Bequest Capital, noted that currency stability, oil prices, and global interest rate expectations remain key variables positioning India favorably on the radar of global bond investors.

Broader Indian financial markets also reflected the positive shift in sentiment. The Indian rupee rose nearly 1% to 94.10 per dollar, while the benchmark Nifty 50 index gained 6.7% over the week to reach 24,612. The US midterm election outcome raised prospects of a diplomatic resolution to the Iran conflict, triggering a 15% drop in oil prices—their sharpest weekly fall since April 2020.

As the world's third-largest oil importer, the decline in crude prices helps alleviate trade and fiscal pressures for India, while also cooling the domestic inflation outlook. This dynamic has weakened the argument for front-loaded monetary tightening by the central bank. Alok Singh, head of treasury at CSB Bank in Mumbai, remarked that the possibility of an agreement between the US and Iran has significantly improved market sentiment, noting that further downside in the 10-year yield depends on a lasting resolution to the crisis and crude prices falling below $90.

Reflecting the shift in monetary policy expectations, the one-year OIS rate dropped 32 basis points this week to 6.40%, the two-year rate fell 34 basis points to 6.40%, and the five-year rate declined 37 basis points to 6.49%. Traders reported that market pricing for potential RBI rate hikes has roughly halved from 125 basis points down to a range of 50 to 75 basis points.

"The recent outperformance of Indian government bonds highlights how closely domestic debt markets remain tied to macroeconomic variables such as global crude prices and US Treasury yields. When external pressures like oil inflation ease, it provides vital breathing room for the domestic currency and moderates aggressive rate-hike expectations. For businesses and investors navigating the macroeconomic landscape, stability in currency and interest rate trajectories creates a more predictable environment for capital allocation and long-term planning." — Dr. Shishir Gupta, Founder & CEO, StartupLanes