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Informist, Monday, Jun. 1, 2026

 

By Aaryan Khanna

 

NEW DELHI – The yield on the 10-year government bond is seen rising slightly in June as monetary policy is expected to lay the groundwork for rate hikes and inflation pressures may increase, reflecting the effects of the war in West Asia. Though the bulk of these adverse effects are already priced in, concern about a weak monsoon may take centre stage by the end of the month.

 

The yield on the 10-year benchmark 6.48%, 2035 gilt is seen at 7.05% at the end of June, according to the median of estimates of 19 money managers, treasury heads, and economists polled by Informist. The bond ended at a yield of 7.02% Monday, a couple of basis points higher than 7.00% at the end of May. In May, the benchmark yield ended 1 basis point lower.

 

The first focus for the month is the repo rate decision of the Reserve Bank of India's Monetary Policy Committee, which begins its three-day meeting Wednesday. The consensus view is that the rate-setting panel will keep rates unchanged while raising its CPI inflation forecast for the financial year 2026-27 (Apr-Mar) to around 5.0%, from 4.6% in April, and trimming its GDP growth forecast to around 6.5% from 6.9%. At the very least, RBI Governor Sanjay Malhotra is seen preparing the market for rate hikes later in the financial year, as the current repo rate of 5.25% is not seen as accommodative with inflation rising. On the other hand, a minority of traders expect a 25-bp rate hike Friday. Economists at Standard Chartered Bank expect a cumulative 50 bps of rate hikes, split equally between June and August.

 

"RBI's biggest concern now may not be growth but preventing a second-round inflation spiral and maintaining currency stability. The language would be around this theme," said V.R.C. Reddy, head of treasury at Karur Vysya Bank. "A cautious, calibrated, and continuous vigilance approach would be demonstrated while delivering the policy outcome."

 

The signal of tighter monetary policy will likely push up gilt yields, though significant rate hikes are already priced in, dealers said. At above 7%, the 10-year gilt yield is already pricing in around 75 bps of repo rate hikes in the current financial year. Still, the impact on gilt yields may be amplified by CPI inflation data for May. When the data are released Jun. 12, they may show that retail inflation climbed above the RBI's 4% target for the first time since January 2025.

 

While demand has exceeded supply in the first two months of the financial year, the situation is expected to move towards equilibrium in June. The government's net market borrowing in April was (-) INR 51 billion, according to data released Monday. Long-term investors increased their bond purchases in May as geopolitical uncertainty eased and may not be as aggressive in the current month. The RBI is not expected to buy bonds through open market operations in June, nor is the government seen buying back bonds in a year of expected fiscal stress. The war in West Asia is already seen increasing the Centre's subsidy bill and lowering both tax and non-tax revenues. 

 

An end to the war in West Asia would immediately pull gilt yields down, though the ceasefire between the US and Iran remains fragile. However, with the vital Strait of Hormuz effectively out of commission for more than three months, crude oil prices are not seen cooling in a hurry. The majority of poll respondents fear Brent crude futures may remain near or above $90 a barrel due to a rebound in demand for the commodity, even if the US and Iran agree on a peace deal. This would keep the upward pressure on bond yields.

 

However, some sections of the market expect the central bank to continue keeping systemic liquidity in surplus and avoiding a hike in the repo rate. CPI inflation in April was only 3.48%, still below the central bank's 4% target. Malhotra has also expressed the RBI's ability to look through first-round effects of inflation. IDFC FIRST Bank does not expect the Monetary Policy Committee to raise the repo rate during the current financial year. 

 

"Yield curve may steepen because of liquidity conditions after the RBI dividend and the government's month-end spending," Chief Economist Gaura Sen Gupta of the bank said. "It could also steepen because bond yields had priced in a rate hike and now they do not expect a hike... bond yields have already started to ease."

 

A wildcard that could lead to bond yields plummeting is the inclusion of India's fully accessible route bonds on Bloomberg's Global Aggregate Index. Even speculation about such an inclusion may spur inflows from foreign investors and lead traders to stock up on bonds in anticipation of future foreign purchases. Depending on the weightage of India's government bonds in the marquee index, foreign portfolio investors are seen buying more than $20 billion worth of Indian gilts over the next year. Bloomberg Index Services in January pushed its decision on India's inclusion to mid-2026.

 

All in all, the bond market is seen volatile through June, keeping traders on their toes. Early monsoon readings will be in focus by the end of the month to track rainfall in crop-producing areas. Weather agencies have forecast the El Nino phenomenon to affect India, reducing monsoon rainfall. The India Meteorological Department has forecast rainfall at 90% of the long-period average, indicating deficient monsoon rains. With inflation concerns persisting, investors may demand higher yields on fixed-income investments. 

 

Following are the estimates for yield levels of the 10-year benchmark 6.48%, 2035 bond at the end of June:

 

ORGANISATION	June-end
Bank of Baroda	6.90%-7.00%
CSB Bank	6.82%-7.10%
Edelweiss Mutual Fund	7.00%-7.25%
HDFC Bank	6.90%-7.10%
ICICI Bank	7.15%
ICICI Securities Primary Dealership	7.15%
IDFC FIRST Bank	7.05%
IndiaFirst Life Insurance	7.10%
Karur Vysya Bank	7.05%
Kotak Mahindra Life Insurance	7.00%
Kotak Mahindra Bank	6.95%-7.10%
Large state-owned bank	6.90%
Mirae Asset Mutual Fund	6.90%-7.10%
PNB Gilts	7.15%
Private-sector bank	7.05%-7.10%
Private-sector bank	6.95%-7.05%
Standard Chartered Bank	7.20%
STCI Primary Dealer	7.15%
Tamilnad Mercantile Bank	7.25%
Median	7.05%

 

End

 

US$1 = INR 94.99

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

With inputs from Cassandra Carvalho, Pratiksha, and Janwee Prajapati

Edited by Rajeev Pai

 

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