Indian bond yields have been on the rise as investors weigh the prospects of interest rate hikes and growing concerns over government fiscal conditions. According to Jin10, the benchmark 10-year government bond yield has increased by approximately 34 basis points to 7% since the outbreak of the Iran war three months ago. IndusInd Bank forecasts the yield will reach 7.45% by the end of 2026, while Kotak Mahindra Bank expects it to trade between 6.8% and 7.4% by March next year.
The Reserve Bank of India (RBI) may face pressure to raise borrowing costs in its rate decision on Friday, as a weakening rupee and rising oil prices exacerbate inflation concerns. Although most economists anticipate the central bank will maintain current rates, the derivatives market is pricing in aggressive rate hike expectations, with the five-year interest rate swap having risen over 60 basis points since the war began. Shorter-term government bonds have been hit hardest in this sell-off, with the five-year yield climbing 54 basis points.
Investors will be watching for signs of a hawkish shift from the RBI. Tata Asset Management and Bandhan AMC expect rate hikes of about 75-100 basis points in this cycle.
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