Indian government bonds declined on Thursday — the first trading session of FY27 — with the benchmark yield rising for the twelfth consecutive session, driven by a sharp uptick in crude oil prices and caution ahead of a scheduled debt auction.
The benchmark 6.48% 2035 bond yield rose about 4 bps to 7.0734%, its highest level since May 21, 2024. It ended at 7.0345% in the previous session. Notably, benchmark yields have increased by 37 bps in March and 45 bps in FY26, despite 100 bps of rate cuts by the Reserve Bank of India (RBI).
Investor sentiment weakened after signalled continued military action against Iran over the next two to three weeks, dampening hopes of a near-term resolution to the US-Iran war in the Middle East. This triggered a sharp rally in , with Brent crude futures surging over 6% to $107 per barrel.
The ongoing has significantly altered the dynamics of India’s bond market. Elevated global bond yields, particularly US Treasury yields, are limiting the scope for foreign inflows into Indian debt, thereby keeping G-sec yields elevated. Additionally, rupee depreciation pressures and rising crude oil prices are exacerbating inflation and fiscal concerns, further weighing on bond sentiment and curbing FPI participation in sovereign bonds.
Traders also trimmed positions ahead of the government’s ₹29,000-crore bond auction, marking the commencement of its ₹8.2 lakh crore borrowing programme for the first half of FY27.
The for H1FY27 represents 51% of the total gross borrowing target of ₹16.1 lakh crore for the fiscal year. After accounting for redemptions worth ₹2.5 lakh crore, net borrowings for H1FY27 are estimated at ₹5.7 lakh crore.
Bond Market Outlook
Economists caution that the outlook remains highly uncertain, with fiscal implications contingent on the duration of the geopolitical conflict. Analysts at Yes Bank estimate the fiscal impact could range between 0.2% and 0.5% of GDP.
Given persistent fiscal pressures, elevated global yields, and ongoing weakness, Yes Bank economists expect the 10-year benchmark yield to trade in the range of 6.75%–7.25% during H1FY27, while noting that any de-escalation in the conflict could significantly alter this outlook.
Market participants also believe that yields are increasingly pricing in risks related to inflation and fiscal slippage.
Hitesh Suvarna, Macro Economist at JM Financial, expects inflation to remain within the RBI’s tolerance band in FY27, reducing the need for further monetary easing. He noted that any near-term inflationary pressures are likely to stem from supply-side disruptions rather than demand, making a rate hike unlikely.
“Bond markets are factoring in a scenario of some slippage in fiscal deficit targets or overall debt levels. We expect benchmark yields to harden towards 7.25%–7.3%,” Suvarna said.
The RBI’s upcoming monetary policy decision will be closely watched, with the Monetary Policy Committee scheduled to meet from April 6 to 8, and the repo rate decision due on April 8.