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Informist, Thursday, Mar. 5, 2026

 

By Cassandra Carvalho and Aaryan Khanna 

 

MUMBAI – The military conflict in West Asia and rising crude oil prices and global yields are all likely to push up India's government bond yields by the end of March. However, the Reserve Bank of India's active intervention is likely to contain the rise in yields to a few basis points, with the lack of new supply in the final month of the financial year also keeping yields in check.

 

The yield on the 10-year benchmark 6.48%, 2035 gilt is seen at 6.72% by the end of the month, according to the median of estimates of 13 money managers, treasury heads, and economists polled by Informist. The bond Thursday ended at 6.64%, down 3 basis points from the previous close. At the end of financial year 2024-25 (Apr-Mar), the 10-year benchmark gilt yield was at 6.58%.

 

Bond yields got off to a shaky start in March after the US and Israel launched joint military strikes on Iran, killing its Supreme Leader Ayatollah Ali Hosseini Khamenei. Iran retaliated and clamped down on the movement of ships through the Strait of Hormuz through which a fifth of the world's oil supply passes. Brent crude oil futures have surged over 17% since Friday. Now in its sixth day, the military conflict has widened across the Gulf region and even to the Indian Ocean. The 10-year bond yield hit 6.73% Wednesday, but has since fallen below the key 6.65% level on speculated on-screen purchases by the central bank.

 

As risk appetite is hit, most market segments have been net sellers of gilts this month. The exception is the 'Others' segment, which comprises the RBI, insurance companies, and provident funds. 'Others' have net bought gilts worth INR 473.45 billion over the first three sessions in March, and net purchased gilts worth INR 196.03 billion in the week ended Feb. 27. Market participants speculate most of these purchases are by the RBI to keep yields from surging while infusing liquidity to offset its dollar sales in the foreign exchange market, where similar intervention has been ongoing to limit the fall of the rupee which has again hit record lows.

 

"I would say that if the market settles down and volatility is not there, then they (RBI) might stop (buying gilts on-screen) because from a liquidity perspective, they've done what they wanted to," the head of trading at a foreign bank said. "But, you know, in situations like this (West Asia conflict), probably market needs a calming effect and which is what they will try to probably give. That should be the only thing. I don't think other than that, they really would have too much in mind because they would want to save whatever ammunition they have for next (financial) year when the supply actually begins."

 

The RBI's display of ammunition and appetite in buying bonds has spooked several traders enough to cover short sales and has dissuaded them from taking fresh positions betting on yields to go up during the month, respondents said. A proxy for short sales shows such positions in the 10-year benchmark Thursday were a little more than half those on Friday, especially after INR 320 billion of its fresh supply that day.

 

Another factor that is likely to curb a rise in bond yields is the expectation of ample liquidity, in spite of seasonally high demand for funds and large tax outflows nearing the end of the March quarter. Last month, RBI Governor Sanjay Malhotra reiterated that the central bank would ensure enough durable liquidity in the banking system for the transmission of policy rates in markets including government bonds. His comments in a recent interview that interest rates would be here or lower for a long time have further taken the edge off the impact of higher crude oil prices. 

 

Systemic liquidity in the banking system is expected to briefly fall into a deficit later in the month due to advance tax payments and payments for goods and services tax. Some state-owned banks received calls from the central bank this week enquiring about the need for liquidity infusion measures such as an open market operations auction or a variable rate repo auction.

 

The supply of state bonds this month is seen reducing demand for gilts, as auction sizes of around INR 400 billion every week keep cut-off yields on state bonds lucrative for investors. Demand from insurers, pension funds, and even banks is seen firm at these auctions, but is unlikely to translate to the secondary gilt market this month, participants said. This may be mildly offset by the lack of gilt supply after the last scheduled auction Friday.

 

In the Apr-Jun quarter of FY27, states' borrowing is seen as seasonally low and narrowing spreads may lead to improved demand for gilts. The Centre's record gross borrowing in FY27 is set to temper any optimism of lower bond yields in April. The sentiment has softened after the government ramped up its bond switches since late February to bring down its gross borrowing in FY27. Including two bilateral switches with the RBI, the government's total gilt switches in FY26 have risen to INR 2.69 trillion. The reduction in its redemptions in FY27 has led to the projected gross borrowing for the next financial year falling to around INR 16.15 trillion from the budgeted INR 17.20 trillion. Another switch auction of INR 200 billion is scheduled Monday. If this auction goes through, the gross borrowing for FY27 will be lower by INR 1.25 trillion and just INR 1.34 trillion more than the gross borrowing of INR 14.61 trillion in FY26, which ought to provide some relief to both the lenders and the borrower.

The more urgent bottleneck at hand is the West Asia conflict. The longer the military salvoes go on, the larger its negative implications on India's macroeconomic fundamentals become. This risk is not reflected at all in current gilt yields, which have fallen below the level when the war began thanks to the RBI's intervention, dealers said. The disparity between Indian rates and global yields amidst the conflict is stark.

 

Since the war broke out, the US 10-year Treasury yield has risen 20 bps over Friday's close before the US attacked Iran and is still 18 bps higher than the pre-attack level. In contrast, the domestic 10-year yield has risen only 7 bps and is now below the pre-attack level.

 

So far, foreign portfolio investors have avoided a significant flight to safety as they were already underinvested in gilts. If Indian gilt yields stay low despite India's significant exposure to oil prices, FPIs are likely to call the RBI's bluff and turn homeward by exiting India without the hit of the conflict playing out on their investments. By the end of the month, traders hope for respite and that the intensity of current attacks reduces. Along with crude oil prices, oil and gas supply available domestically will also be closely tracked, with the Centre Tuesday saying the country has around 25 days of crude oil reserves left, as per media reports.

 

"Right now, market doesn't seem prepared for a longer disruption. Market movements are suggesting that maybe the market believes that this (West Asia conflict) will die down. If by the end of the month, over the next 2-3 weeks, there is no de-escalation here and that gets priced in every day that goes by, that can become a major source of risk for markets, not just India, but globally," Sakshi Gupta, principal economist of HDFC Bank, said. "So I think that is one big risk to watch out for is the assumption that this (conflict) is going to be short-lived."

 

The following are estimates for yield levels of the 10-year benchmark 6.48%, 2035 bond at the end of March:

ORGANISATION	March-end
Bank of Baroda	6.65-6.70%
Foreign bank	6.70-6.85%
HDFC Bank	6.60-6.80%
ICICI Bank	6.70%
ICICI Securities Primary Dealership	6.65%
IDFC FIRST Bank	6.70-6.75%
IndiaFirst Life Insurance	6.85%
Industrial and Commercial Bank of China	6.70-6.75%
Karur Vysya Bank	6.60-6.62%
PNB Gilts	6.72%
Private sector bank	6.75-6.80%
STCI Primary Dealer	6.60-6.70%
Sundaram Mutual Fund	6.70-6.90%
Median	6.72%

 

End

 

Edited by Ashish Shirke

 

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