India’s government bond yields are set to remain under pressure in the near term as the energy shock triggered by the West Asia conflict feeds inflation worries, outweighing the comfort from abundant system liquidity and a steady monetary policy stance, according to a report by Crisil Intelligence.
The yield on the 10-year benchmark government security ended April at 7.02 per cent, unchanged from March, after a volatile month in which crude oil prices, global bond movements and geopolitical developments dictated trading sentiment. Crisil projects the 10-year yield in a 6.98–7.08 per cent band by end-May and 7.03–7.13 per cent by end-July.
The report shows that while domestic liquidity remained in surplus through April — averaging about Rs 3.84 lakh crore — yields did not ease meaningfully as investors grappled with rising crude prices, higher US Treasury yields and global uncertainty. The yield curve steepened during the month as longer-tenure securities faced selling pressure.
Brent crude prices surged to an average USD 120.4 per barrel in April, up sharply from recent months, amid rising geopolitical tensions and disruption of energy supply routes. Crisil said the closure of the Strait of Hormuz had created the “largest energy shock on record”, with effects extending beyond oil to freight, insurance, fertilisers and supply chains. It has revised its crude price forecast for fiscal 2027 to USD 90–95 per barrel from USD 82–87 earlier.
This energy shock is feeding directly into India’s inflation and growth outlook. Crisil expects consumer price inflation to average 5.1 per cent in fiscal 2027, up from 2.0 per cent in fiscal 2026, driven by higher fuel, input and transportation costs, along with risks to food output from El Nino and heatwaves. At the same time, real GDP growth is seen slowing to 6.6 per cent from 7.6 per cent as global trade disruptions and higher import costs weigh on manufacturing and exports.
The Reserve Bank of India is expected to keep policy rates and its neutral stance unchanged in the forthcoming review, limiting the scope for any near-term relief to bond markets from monetary easing. Crisil noted that the monetary policy committee’s decision to hold rates in April reflected a wait-and-watch approach amid rising inflation risks.
Fiscal dynamics are also adding to supply concerns. Gross market borrowing is estimated to rise to Rs 16.1 lakh crore in fiscal 2027 from Rs 14.6 lakh crore in fiscal 2026, with over half scheduled for the first half of the year. Prolonged conflict could further strain government finances through higher oil and fertiliser subsidies.
Despite these pressures, liquidity conditions offered intermittent support. Surplus liquidity peaked at around Rs 5.5 lakh crore in early April before tightening to about Rs 2.6 lakh crore by month-end due to advance tax outflows, goods and services tax payments, currency leakage and the RBI’s forex interventions. The central bank conducted variable rate repo operations to smooth mismatches.
Foreign portfolio investors continued to pull money out of the debt market, with net outflows of Rs 10,826 crore in April compared with Rs 8,469 crore in March. At the same time, US Treasury yields hardened to 4.40 per cent as markets reassessed the timing of rate cuts amid sticky inflation and higher energy prices, narrowing the spread with Indian bonds.
Spreads between state development loans, corporate bonds and benchmark G-secs widened beyond their 12-month averages, reflecting risk aversion and a preference for higher compensation for holding longer-duration and lower-rated paper. Trading volumes showed increased activity in corporate bonds even as SDL volumes fell sharply. |
