India’s Bond Yields Could Fall To 6.5% Amid Global Rate Trends, Economists Predict

With 10-year benchmark bond yields falling below 6.75%, further reductions could be expected given current global conditions and upcoming domestic developments.

The benchmark 10-year government bond has already seen yields drop to 6.7%- the lowest since 2022, aided by the global monetary easing cycle and robust foreign flows amidst the price differentials.

"We anticipate India’s 10-year government security to trend towards 6.5-6.6% by the end of this fiscal year," said Sonal Badhan, economist at Bank of Baroda. She explained that the Fed's aggressive rate cuts and the Reserve Bank of India's moderate approach to rate reductions will maintain a wider spread between US and Indian 10-year benchmark bonds, encouraging foreign inflows. "This is expected to further lower yields," she added.

Gaura Sengupta, economist at IDFC First Bank, similarly predicted that the 10-year yield would fall to 6.5% by March 2025. This forecast assumes a 50 basis points rate cut by the central bank between December and February, along with favourable demand-supply dynamics for government securities. Interbank liquidity is also expected to remain stable with an increase in core liquidity.

The statements come after the yield on the 10-year note fell 50 basis points so far this year.

Sengupta further noted that the interest rate differential between India and the US is likely to widen due to the Fed's more rapid rate cuts. She added that the market has already factored this in, as seen in the rise of forward premiums.

However, Madhavi Arora, lead economist at Emkay, suggested that while healthy inflows may persist until December, a rate cut before then is unlikely. "There’s a limit to how much further yields can fall before December," she said. "We don't see much room left in the rally, as the repo-10-year spread has now narrowed to just 24-25 basis points."

The central bank has maintained its benchmark interest rate at 6.5% since February 2023 to balance inflation control with economic growth.

From a bond market perspective, little is expected from the Reserve Bank of India at present, according to Vivek Kumar, economist at QuantEco Research. In the near term, there is uncertainty surrounding monetary policy. He questioned whether the Monetary Policy Committee would align with the global rate cycle or continue to focus on retail inflation in the October policy review.

Kumar noted that although food prices are beginning to correct, the pace is slower than anticipated. He expressed hope that prices would fall further in October and November when Kharif crops reach the market.

Kumar pointed out that global rate sentiment will play a key role in determining yields, particularly given the current global monetary policy environment, which he described as "conducive." He added that Overnight Index Swap rates have eased, which is reflected in Foreign Portfolio Investor (FPI) demand. India's inclusion in global bond indices is also influencing the market, he said.

However, Kumar cautioned that if the RBI continues to delay rate cuts, it will need to address the "impossible trinity"—balancing exchange rates, free capital movement, and independent monetary policy. He explained that prioritising monetary policy independence would require the RBI to intervene more aggressively to stabilise the rupee, though this could conflict with its inflation-targeting objectives. Donald Trump's re-election in the United States, and the steep tariffs he is likely to impose on imports from China, will also mean a steep devaluation in the Yuan, cautioned Jahangir Aziz, head of emerging markets economics research and commodities, JPMorgan. The move will mean some eventual appreciation in the Rupee against the Yuan, leaving Indian exporters facing a large disadvantage.