Indian government bond yields have climbed to levels that now look attractive to investors, according to DBS Group Research strategist Sherilyn Chew, who pointed to hawkish minutes from the Reserve Bank of India’s latest policy meeting and renewed volatility at the long end of the US Treasury market as the main drivers of the recent sell-off.
In a note published this week, Chew said the repricing in Indian rates has opened up entry points for fixed-income investors, though she cautioned that the outlook remains tied to global monetary policy and currency movements.
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What’s behind the move in Indian rates?
The Reserve Bank of India’s monetary policy committee minutes, released earlier this month, carried a more hawkish tone than markets had anticipated. Several members emphasized the need to remain vigilant on inflation, which has stayed above the central bank’s 4% medium-term target for much of the year. That messaging prompted traders to scale back bets on near-term rate cuts, pushing shorter-dated yields higher.
At the same time, the long end of the US Treasury curve has been under pressure. Persistent concerns about fiscal deficits and sticky inflation in the United States have driven 10-year Treasury yields to their highest levels in months. Because Indian bonds are sensitive to global rate movements — particularly through foreign portfolio flows — the spillover has been direct.
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According to Chew, the combination of domestic hawkishness and external pressure has resulted in a steeper Indian yield curve, with the 10-year benchmark government bond yield moving up by roughly 15–20 basis points over the past few weeks.
Why the sell-off may be a buying opportunity
Chew argues that the current yield levels now compensate investors for the risks, especially when adjusted for inflation and compared with other emerging markets. India’s real yields — nominal yields minus inflation expectations — have turned positive, offering a cushion that was absent earlier in the year.
Foreign investors have taken notice. Data from the National Securities Depository Ltd. shows that overseas holdings of Indian government bonds have been rising steadily since the country’s inclusion in the JPMorgan emerging market bond index in June 2024. The index inclusion has brought a steady stream of passive inflows, which analysts expect to continue.
However, Chew also flagged that the rupee remains a wildcard. The Indian currency has been under intermittent pressure against the US dollar, and any sharp depreciation could erode the attractiveness of local bonds for foreign investors. The RBI has intervened in the forex market to smooth volatility, but its ability to do so is not unlimited.
What to watch next
Market participants will be closely monitoring the RBI’s next policy decision, scheduled for early October. If inflation continues to moderate, the central bank may signal a shift toward a less hawkish stance, which could trigger a rally in bonds.
On the global front, the trajectory of US Treasury yields will remain a key driver. Any signs that the Federal Reserve is preparing to cut rates more aggressively would likely ease pressure on emerging market assets, including Indian bonds.
For now, DBS’s view is that the risk-reward has improved, but investors should remain selective and mindful of both currency and global rate risks.
This article is for informational purposes only and does not constitute financial advice. Market conditions are volatile and uncertain; readers should conduct their own research or consult a qualified advisor before making investment decisions.
