FX.co ★ India 10Y Yield Extends Rebound

India’s 10-year government bond yield climbed to around 7.20%, extending its rebound from a more than one-month low, as rising US Treasury yields and worries about additional bond supply weighed on debt prices. The US 10-year Treasury yield surged toward 5% after stronger-than-expected inflation data, eroding the relative appeal of Indian securities and potentially curbing foreign investment flows.

At the same time, India’s sizable government borrowing requirements and ongoing issuance of the benchmark 10-year bond are adding to the supply of securities, while tighter liquidity in the banking system could limit domestic demand. Persistently high domestic inflation may also restrict the Reserve Bank of India’s room to cut interest rates, helping keep borrowing costs elevated.

However, a 17% drop in crude oil prices last week has eased imported inflation pressures and improved prospects for India’s external balance and public finances. This development could afford the RBI more scope to loosen monetary policy over time, putting downward pressure on bond yields.