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Informist, Wednesday, Jul. 1, 2026

 

By Aaryan Khanna

 

NEW DELHI – The sharp fall in government bond yields is likely to cool in July after a torrid June that saw the biggest decline in the 10-year benchmark yield since the COVID-19 pandemic. With traders discounting risks of rate hikes and additional supply in a hurry, most market participants suspect the biggest leg of the rally may have passed by. 

 

The yield on the 10-year benchmark 6.94%, 2036 gilt is seen at 6.73% at the end of July, according to the median of estimates from 15 money managers, treasury heads, and economists polled by Informist. After a steady May, the 10-year benchmark yield fell 25 basis points in June to 6.75%, the biggest monthly fall since May 2020. The bond ended at a yield of 6.76% Wednesday.

 

"We expect IGB (Indian government bond) yields to trade in a narrow range in the near term as investor positioning is turning heavy, FPI (foreign portfolio investor) debt inflows to taper going forward amid strengthen of the DXY (dollar index), smart outperformance of the long-end in June 2026," Dhawal Dalal, chief investment officer–fixed income at Edelweiss Asset Management Ltd., said. "We see IGBs as close to fairly valued at current levels."

 

Gilt yields were propelled downwards in June after the government exempted foreign portfolio investors from capital gains tax and withholding tax on their investments into government securities. FPI investment into Fully Accessible Route bonds was at a 15-month high of $2.15 billion, according to depository data. The Reserve Bank of India's measures to stabilise the rupee also improved risk appetite, as did a sharp decline in crude oil prices and the truce in West Asia.

 

A further downward move in yields is contingent on Bloomberg Index Services giving its nod to the inclusion of India's index-eligible Fully Accessible Route bonds on its marquee Global Aggregate Index. Passive flows alone are expected to near $25 billion provided India's bonds have a 0.7-1.0% weight on the index, though the actual inclusion is only likely to begin in 2027. Already, several foreign and private-sector banks have piled into bonds anticipating a positive decision in the first half of July, effectively front-running the flows. 

 

The index provider had held off on the inclusion in January and said it was under review, with the next update in mid-2026. Kotak Mutual Fund sees the 10-year yield at 6.60% by July-end if the index inclusion is announced.

 

"Sentiments will improve in July due to Bloomberg Global Aggregate Index inclusion if it happens even though flows are seen only in the next year," Gaura Sen Gupta, chief economist at IDFC FIRST Bank, also said.

 

However, respondents, including DBS Bank, see a limited downside to gilt yields as long as US Treasury yields remain high. After the initial rush following the tweaked tax norms, FPI investment is expected to slow as the spread of India's gilts over US Treasury yields has fallen, making local debt less attractive. While India's gilt yields have declined as rate hike fears have cooled, the returns on US sovereign debt have remained high on concern about rate hikes by the US Federal Open Market Committee in the remainder of 2026.

 

Another flashpoint could be a flare-up between the US and Iran, though respondents said this was unlikely. Most do not see gilt yields rising significantly in July as the West Asia war winds down. However, with Brent crude futures already falling to the pre-war level, a further positive for gilt yields is unlikely and the risks are tilted to the upside, respondents said.

 

Global cues remain significant for bond market participants with no crucial domestic data coming up and dealers convinced the RBI's Monetary Policy Committee will not hike the repo rate in August or even in October, its next two meetings. CPI inflation is expected to rise in June above the RBI's 4% target, but not by enough to warrant an immediate rate hike. Traders now expect the central bank to retain its 5.1% CPI inflation forecast for the financial year 2026-27 (Apr-Mar) or even revise it slightly downwards.

 

The key to that will be a revival in rainfall, which undershot the long-period average by nearly 40% in June. The India Meteorological Department projects the average rainfall in July to be around 94% of the long-period average. Policymakers, including RBI Governor Sanjay Malhotra, have said they would avoid interest rate hikes unless inflation expectations become unanchored, which could be the case if food inflation shoots up due to the deficient monsoon, respondents said. 

 

"It's the rains which will determine the medium-term trajectory for gilts," said Alok Singh, head of treasury at CSB Bank. "If the monsoon is only 10-12% in deficit, then inflation expectations will remain in check and yields can continue falling, which is our base case."

 

If the 10-year yield is to go below 6.70%, the lowest so far in FY27, bond market dealers are confident it will do so in the September quarter. Demand is expected to match supply comfortably, helped by FPIs and improved appetite from banks as foreign exchange deposits grow due to an RBI incentive. The indicative state bond calendar for Jul-Sept of INR 3.19 trillion was also well within expectations. An average of 11 responses showed the 10-year yield is seen at 6.75% by September, with higher supply coming up in the second half of the financial year.

 

"By the end of the September quarter, yields could rise as a lot of the good news is priced in and there is higher supply in both gilts and state bonds (in Oct-Mar)," economist Sen Gupta said. The government is borrowing only 51% of its gross issuance for FY27 in Apr-Sept, leaving a larger-than-usual portion to the second half of the financial year when states also ramp up their borrowing.

 

Following are the estimates for yield levels of the 10-year benchmark 6.94%, 2035 bond at the end of July and September:

 

ORGANISATION	July-end	September-end
CSB Bank	6.70-6.72%	6.64%
DBS Bank	6.62-6.67%	6.62-6.67%
Edelweiss Asset Management	6.65-6.75%	6.60-6.70%
ICICI Bank	6.75%	--
IDFC FIRST Bank	6.65-6.75%	--
Karur Vysya Bank	6.65-6.80%	6.70-6.80%
Kotak Mahindra Bank	6.65-6.70%	--
Kotak Mutual Fund	6.60-6.80%	6.60-6.80%
LIC Mutual Fund	6.70-6.80%	6.90%
Shinhan Bank India	6.80-6.85%	--
South Indian Bank	6.60-6.90%	--
STCI Primary Dealer	6.80-6.85%	6.85-6.90%
Tamilnad Mercantile Bank	6.90%	Over 7%
Tata Mutual Fund	6.75%	6.75%
UCO Bank	6.72%	6.84%
Median	6.73%	6.75%

 

End

 

US$1 = INR 95.24

 

With inputs from Janwee Prajapati

Edited by Rajeev Pai

 

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