India's government bonds just wrapped up their 10th consecutive weekly decline, a losing streak that has pushed the yield on the benchmark 2036 bond to 7.4740%. The persistent selloff is being driven by two forces: crude oil prices hovering near $115 a barrel and growing expectations that the Reserve Bank of India (RBI) will keep raising interest rates.
Bond prices and yields move in opposite directions. When investors sell bonds, prices fall and yields rise. This week, the yield on the 6.94% 2036 bond rose about 9 basis points, according to Reuters, adding to a much larger jump over the prior nine weeks. A basis point is one-hundredth of a percentage point.
Why are bond yields climbing?
The immediate trigger is policy expectations. The RBI has already lifted its key repo rate to 5.5% and adopted a "calibrated tightening" stance, signaling more hikes are on the way. ICICI Securities Primary Dealership has said the policy rate could reach 6% by February. When investors expect higher rates, they demand higher yields on existing bonds to compensate for the lower relative attractiveness of fixed coupons.
Oil is the other major pressure point. India imports close to 90% of its crude, so sustained high prices can lift inflation, widen the import bill, and pressure the rupee. All of that makes long-dated bonds feel riskier. As a result, overnight indexed swap (OIS) rates—a market gauge of expected policy rates—were largely steady this week even as cash bond yields kept climbing.
What does the yield gap tell us?
The divergence between the 2036 bond yield (7.4740%) and the 5-year OIS (6.8150%) is notable. When swap rates don't move much but government bond yields rise, investors are demanding extra compensation specifically for holding the bonds. That extra compensation is a mix of term premium—the reward for locking money up for longer—and liquidity premium—the reward for holding assets that may be harder to trade without moving the price.
The upshot is that India's overall rupee borrowing costs can rise even if expectations for the RBI's next few moves don't change. Because government yields serve as the reference point for pricing everything from state borrowing to corporate bonds, this widening gap can spill into higher funding costs across rupee credit markets.
What it means for investors
For everyday investors, the bond selloff has ripple effects. Higher government yields typically translate into higher interest rates on loans, including home loans and corporate borrowing. That can weigh on economic growth and corporate profits. It also affects fixed-income investments: existing bond funds may see mark-to-market losses, while new investments in bonds or debt funds could offer higher yields going forward.
The broader market has already felt the pinch. Indian stocks have slipped in recent sessions as oil prices climbed and the RBI signaled more hikes, as we noted in our coverage of the market's reaction. Higher oil prices also squeeze companies like HPCL, whose profits have dropped as crude costs and taxes eat into fuel margins, as we reported in HPCL's latest earnings.
Investors should watch two things in the coming weeks: the trajectory of oil prices and any signals from the RBI about the pace of rate hikes. If oil stays elevated and the RBI delivers the expected hike to 6%, bond yields could climb further. Conversely, any easing in oil prices or a more dovish tone from the central bank could help stabilize the market.
For now, the 10-week losing streak is a reminder that bond markets are sensitive to inflation and policy expectations. As we've seen with South African bonds rallying on different policy moves, central bank actions and market sentiment can shift quickly. Staying informed about these dynamics is key for anyone with exposure to fixed income or interest-rate-sensitive sectors.
