More Stories

Informist, Monday, Aug. 3, 2026

 

By Aaryan Khanna

 

MUMBAI – Government bonds are expected to remain steady by the end of August as the impact of rising inflation puts upward pressure on yields while foreign currency non-resident (banks) deposits add to demand for bonds. The Reserve Bank of India's Monetary Policy Committee is universally expected to stand pat on its policy rate and stance Wednesday, but developments relating to the war in West Asia will be closely tracked through the month for further cues on interest rate changes, bond market participants said. 

 

The yield on the 10-year benchmark 6.94%, 2036 gilt is seen at 6.82% at the end of August, according to the median of estimates from 14 money managers, treasury heads, and economists polled by Informist. With Brent crude futures shooting up nearly 24% in July, the 10-year yield rose 8 basis points to 6.83% by Friday and ended at the same level Monday.

 

The trajectory of crude oil prices will be a key factor as a slump in the commodity's price in June had helped gilts chart their best month since the pandemic. India, which imports over 80% of its crude oil requirement, is highly sensitive to the fluctuation. Bond yields are expected to stay in a narrow band as long as Brent futures trade between $75 and  $95 per barrel. However, a continuation of the war between the US and Iran is seen putting upward pressure on crude oil prices in August as well, especially as traders worry that any peace deal between the two sides may well prove to be temporary.

 

"In August and September, the 10-year yield should hover in the range of 6.75-7.00% due to FCNR inflows," said Marzban Irani, executive director – investments, at LIC Mutual Fund. "Gradually yields are expected to move upwards only. Oil prices, food inflation, fiscal issues will push the (10-year yield) towards 7%."

 

Most traders do not expect the Monetary Policy Committee's rate decision to materially affect gilt yields with the repo rate seen unchanged Wednesday at 5.25%. RBI Governor Sanjay Malhotra is expected to reiterate that the central bank is focused on inflation control but without hinting at tightening monetary policy, respondents said. The governor had said in June that it was premature to talk about rate hikes. In late July he said he did not see any build-up of second-round effects of inflation. With such remarks, the three RBI members of the rate-setting panel are expected to vote for a status quo, though some fear a split vote on the pause could push up gilt yields.

 

Inflation for July is also expected to climb from June's 4.38% reading when it is released mid-month, though it will still be well below the upper bound of the RBI's 2-6% target range. As long as the quarterly CPI forecasts remain under 6%, dealers do not see market expectations to shift to rate hikes in a hurry, even for October. Moreover, robust FCNR(B) inflows are expected to keep demand and supply conditions in balance through August.

 

As per the latest data, the RBI's measures to garner inflows through FCNR(B) deposits, overseas foreign currency borrowings by banks, and external commercial borrowings by public-sector undertakings had attracted $40.82 billion from Jun. 8 till Friday. A major portion--$36.73 billion--of these inflows came from FCNR(B) deposits. The current run-rate suggests that dollar inflows on the back of the RBI's incentive scheme may top $100 billion by Sept. 30, with inflows seen rising in the final month, respondents said.

 

Banks flush with funds are likely to deploy them into gilts, especially those maturing in and under five years. Based on past activity, most respondents expect state-owned banks to ramp up purchases as the 10-year yield approaches 6.90%. At the same time, Friday's announcement by Bloomberg Index Services that it has deferred the inclusion of Indian government bonds in its global benchmark index may lead to foreign portfolio investors selling bonds in August after net purchases in June and July. The index provider said positive developments had taken place since the last update in January and the recent regulatory changes improve market access for foreign portfolio investors, but more time was warranted to make a decision on the index inclusion.

 

"There should be an upward pressure on the 10-year yield, especially after the Bloomberg index decision has not gone in our favour," Canara Bank's Chief Economist G. Madhavankutty said. His estimate of 7.00% is the same as the median of 11 respondents for the end of the quarter in September.

 

Though the benchmark bond yield may be steady at August-end, it is expected to be buffeted by both domestic and global factors. Further updates on the war in West Asia, the progress of the southwest monsoon, and fiscal data are all expected to cause volatility in bond yields. The release of June quarter GDP data at the end of August could also shift rate expectations if it shows growth has held up while inflation is rising. Ultimately, as has been the case over the past few months, crude oil prices may be the gamechanger. 

 

"Crude is going to be the decider as we have been at the mercy of this war and all the developments around it," a trading head at a primary dealership said. "We moved down sharply (in yield terms) in June when there was a ceasefire. Now, if another peace deal is agreed to, I don't see why the (10-year) yield cannot fall to 6.75%--but not below that."

 

Following are the estimates for yield levels of the 10-year benchmark 6.94%, 2036 bond at the end of August and September:

 

ORGANISATION	August-end	September-end
Bank of Baroda	6.70-6.80%	6.70-6.80%
Canara Bank	6.80-6.85%	6.85-6.90%
CSB Bank	6.80%	7.00%
IBM India	--	7.00%
ICICI Bank	6.75-6.90%	--
ICICI Securities Primary Dealership	6.90%	7.15%
IDFC FIRST Bank	6.80-6.90%	6.80-6.90%
Karur Vysya Bank	6.80-6.95%	6.80-6.95%
Kotak Mahindra Life Insurance Co.	6.80%	6.75%
Kotak Mahindra Bank	6.75-7.00%	--
Kotak Mahindra Mutual Fund	6.80-6.90%	6.80-6.90%
LIC Mutual Fund	6.75-7.00%	6.75-7.00%
PNB Gilts	6.84%	--
South Indian Bank	6.70-6.95%	6.65-6.95%
Median	6.82%	7.00%

 

End

 

US$1 = INR 95.33

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

 

Edited by Rajeev Pai

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

 

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2026. All rights reserved.