Informist Poll
West Asia war impact may keep 10-yr gilt tied to 7% May-end
This story was originally published at 20:18 IST on 5 May 2026
Register to read our real-time news.Informist, Tuesday, May 5, 2026
By Aaryan Khanna
NEW DELHI – Indian government bond yields are expected to remain broadly at the same level by the end of May if there is no big breakthrough in the war in West Asia. Gilt traders are running light portfolios and have space, but not the risk appetite, to buy more bonds due to the war, even if it remains low-intensity, according to market participants.
The yield on the 10-year benchmark 6.48%, 2035 gilt is seen at 7.00% at the end of May, according to the median of estimates of 17 money managers, treasury heads, and economists polled by Informist. The bond ended at 7.02% yield Tuesday, slightly higher than 7.01% at the end of April. In April, the benchmark yield had fallen 2 basis points.
With the war in West Asia entering its third month, the divergence in respondents' estimates hinges very strongly on the direction that the conflict takes. UCO Bank sees cooling of hostilities and improved oil supply driving down Brent crude near-month futures to $90 a barrel and, hence, its view that the 10-year gilt yield will fall to 6.84%. Kotak Asset Management Co. Ltd. expects higher crude oil prices through the month to push up the domestic 10-year benchmark yield to 7.15-7.25%.
Traders await inflation data for April to gauge the impact of high oil prices and supply chain disruptions. The pass-through of these so far will be more apparent in wholesale rather than CPI inflation, market participants said. Retail inflation is still in focus though, as respondents are worried about a hike in prices of petrol and diesel in May with key Assembly elections having been concluded. Monetary Policy Committee member Ram Singh said on Tuesday that he too expects a hike in retail prices of fuels.
Market players estimate that a hike of INR 5-8 per litre in pump prices of vehicle fuels will likely push retail inflation towards the upper end of the RBI's 2-6% tolerance band for CPI inflation. Concerns about a near-deficient southwest monsoon will also rear their head by the end of the month as the market tracks preparations for kharif sowing, respondents said. CPI inflation for March rose to a one-year high of 3.4% but showed a limited impact of the West Asia war, economists had said.
The overall government bond yield curve will move in line with the benchmark 10-year bond yield. Short-term yields will remain high due to inflation and rate hike concerns but should fall more than the 10-year gilt in case of positive news, leading to the yield curve steepening, respondents said. Demand for bonds maturing in 30-50 years is likely to match supply at auctions, as the share of these bonds has fallen to 25% in the Apr-Sept borrowing calendar from 35% a year ago.
May is the first month with positive net supply of gilts in the financial year. Three bond redemptions in April worth INR 1.56 trillion effectively led to investors replenishing their holdings with the INR 1.24 trillion of government bonds auctioned so far this year. Naturally, both optimism and adversity will be best reflected in the benchmark 6.48%, 2035 gilt. A new 10-year, 2036 bond will be issued Friday but is unlikely to gain currency as the new benchmark by the end of the month, respondents said.
"After remaining lower for quite some time, now the benchmark yield is springing higher before reaching an equilibrium," Poonam Tandon, chief investment officer at IndiaFirst Life Insurance, said. "Especially since the supply of 30-year-plus gilts has reduced in this calendar, it could put more pressure on the 10-year bond yield to rise in response to these pressures."
At the same time, bond yields have already priced in significant bad news from the war. Gilt yields are already reflecting the Reserve Bank of India's Monetary Policy Committee hiking the repo rate, currently at 5.25%, by 75 basis points in FY27. Recent comments by the committee have shown its intention to look through some of the supply-side inflation shock, calming the market's nerves on immediate rate increases. Short-term gilts have found some enthusiastic buyers as yields turn attractive compared with the cost of funds, with the three-year gilt yielding 6.34% on Monday and the five-year gilt yield at 6.77%.
Traders have begun discussing an expected increase in the government's spending to keep the economy on an even keel, with officials acknowledging the fertiliser subsidy bill is likely to rise substantially. However, respondents were not too worried about additional supply of bonds just yet and expect the government's books will balance by the end of the financial year in March. The RBI's surplus transfer for FY26, expected in the third week of May, will add to the government's spending power during the crisis, respondents said.
The Union Budget for FY27 pegged the RBI surplus transfer and dividend from state-owned banks at INR 3.16 trillion, up 3.7% on year. With the bulk of that likely to come from the central bank, traders said there is a high bar for a positive surprise. In a report Monday, IDFC FIRST Bank said it expected the RBI to match last year's record surplus transfer of INR 2.7 trillion to the government.
Some traders expect an RBI surplus transfer in excess of INR 3 trillion if the central bank brings down its contingent risk buffer this year to help the Centre's finances. Last year, the central bank had raised the buffer by 100 basis points to 7.50% of its balance sheet, avoiding a transfer of around INR 760 billion to the government. This counter-cyclical move may pull down gilt yields slightly, though the overall direction will be determined by overseas factors, including expectations of rate changes in advanced economies, respondents said.
"The market will not take too much comfort from the RBI dividend as the government has already budgeted a very high number," Sakshi Gupta, principal economist at HDFC Bank, said. "In only the second month of the (financial) year, I don't think supply-demand dynamics are playing too much of a part and it's not as if the market expects a higher supply of dated securities (in FY27) due to the war (in West Asia)."
Following are the estimates for yield levels of the 10-year benchmark 6.48%, 2035 bond at the end of May and June:
| ORGANISATION | May-end | June-end |
| Bank of Baroda | 6.95-6.97% | -- |
| DCB Bank | 6.85-7.00% | -- |
| Edelweiss Mutual Fund | 7.10-7.15% | 7.10-7.25% |
| HDFC Bank | 6.90-7.10% | 6.80-7.25% |
| ICICI Bank | 7.00% | 7.00% |
| ICICI Securities Primary Dealership | 7.00% | 6.95-7.15% |
| IDFC FIRST Bank | 6.90% | -- |
| IndiaFirst Life Insurance | 7.05% | -- |
| Karur Vysya Bank | 6.90-6.95% | -- |
| Kotak Mahindra Bank | 7.00-7.10% | 7.10-7.20% |
| Kotak Mahindra Asset Management Co. | 7.15-7.25% | -- |
| PGIM India Mutual Fund | 6.75-7.15% | -- |
| PNB Gilts | 7.02% | 7.18% |
| Shinhan Bank India | 7.10% | -- |
| STCI Primary Dealer | 7.00-7.05% | -- |
| Sundaram Mutual Fund | 6.90-7.10% | -- |
| UCO Bank | 6.84% | -- |
End
With inputs from Pratiksha and Kabir Sharma
Edited by Avishek Dutta
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