Rate hikes unlikely to push bond yields much higher: businessline poll

India’s benchmark 10-year government bond yield is unlikely to rise significantly from current levels even if the Reserve Bank of India raises the repo rate by another 50 basis points to 6 per cent by February 2027, according to economists and treasury heads surveyed by businessline. Market participants believe a large portion of future monetary tightening has already been priced into the bond market, limiting the scope for a sharp increase in yields.

The benchmark 10-year government bond yield was trading near 7.4 per cent on Friday, while the poll’s median estimate suggested yields would remain broadly around 7.6 per cent by the end of FY27 despite further policy tightening. The RBI had indicated in its October monetary policy that the path ahead would either involve rate hikes or an extended pause, effectively ruling out the possibility of rate cuts in the near term.

Economists argued that while inflation concerns remain, several countervailing factors could prevent bond yields from rising substantially. Slower economic growth, moderation in private-sector credit demand and abundant system liquidity are expected to cushion the impact of higher policy rates.

“As the interest rates in the economy go higher, we will definitely see some sobering on the growth. If we see a sobering on the growth, and if credit needs of the industry go lower, then the excess funds that the banking sector will have today through the FCNR(B) will gradually then enter the government securities market,” said Indranil Pan, Chief Economist at YES Bank, who expects the 10-year yield to settle at around 7.35 per cent.

Treasury officials largely shared that view. “The expectation is yield may not go beyond 7.6 per cent. Whenever it comes to the range of 7.50 per cent to 7.60 per cent, it is a very good buying opportunity,” said Gopal Tripathy, Head of Treasury at Jana Small Finance Bank.

Benign outlook

The relatively benign outlook for bond yields also suggests that government borrowing costs may not rise materially despite higher policy rates. Since sovereign borrowing rates are benchmarked to government securities, stable yields could help contain financing costs for the Centre.

“Higher borrowing costs getting to 6.50 per cent repo rate is at previous peak of 2023 and that does not necessarily impede government spending,” said Anitha Rangan, Chief Economist at RBL Bank, noting that government capital expenditure has continued to rise despite elevated interest rates.

Madan Sabnavis, Chief Economist at Bank of Baroda, expects the benchmark yield to remain in the 7.35-7.45 per cent range, although a consumer inflation print above 6 per cent could trigger an “upward thrust” in yields if markets begin pricing in additional hikes.

A more hawkish assessment came from Rajeev Pawar, Head of Treasury at Ujjivan Small Finance Bank, who sees the 10-year yield touching 7.75 per cent amid higher government borrowing linked to drought-relief spending and increased state borrowings. Even so, market participants said yields are unlikely to sustain levels significantly above current estimates, as higher crude oil prices and even up to 75 basis points of additional repo rate hikes are already largely reflected in bond market pricing.