India bonds see sharpest selloff in three years on fiscal, monetary policy blows

MUMBAI: Indian government bonds sold off this month, with the 10-year benchmark bond yield posting its biggest monthly spike in three years as disappointment from the monetary policy and fiscal front sapped investor appetite and raised uncertainty.

The benchmark 10-year bond yield ended at 6.5678% on Friday, after closing at 6.5328% on Thursday. The yield rose 19 basis points in August, its biggest monthly leap since September 2022.

Bond yields started rising after the Reserve Bank of India held rates around the start of the month, while expecting retail inflation to rise above 4% from 2026. Bond market sentiment also took a hit after the U.S. imposed up to 50% tariff on Indian goods.

Goldman Sachs said five-year to 30-year bond yields have been rising on fiscal concerns over potential government steps to support vulnerable groups impacted by tariffs. As front-end yields are well priced and long-end yields are rising, the bank said it has a neutral near-term outlook on Indian bonds.

India’s 10-year bond yield logs biggest drop in 15 weeks on technical buying

Yields witnessed a brief respite as S&P upgraded India’s ratings to ‘BBB’ from ‘BBB-’ earlier this month. Hopes of any large recovery for bonds were thwarted however, after the government announced its plans to cut goods and services tax rates from as early as October, spurring fears that it could borrow more in the second half of the year.

The proposed tax cuts have dented investor appetite, with spillover impact on state bonds as well.

Bond traders are now calling for central bank intervention as a sharp drop in institutional buying has pushed yields higher, threatening to stall monetary transmission of 100 basis points of rate cuts so far this year, according to market participants.

Meanwhile, India’s economy unexpectedly expanded 7.8% year-on-year in the April-June quarter, picking up from 7.4% in the previous three months, and higher than 6.7% expected in a Reuters poll.

Rates

India’s overnight index swap rates were mixed, with the shorter duration swap little changed, but the most liquid five-year swap rate rising.

The one-year OIS rate ended at 5.5150%, while the two-year OIS rate ended at 5.49%. The five-year OIS rate rose 5 bps in August to end at 5.78%.