Indian government bonds rose for a second day as cooling U.S. inflation data reduced global rate hike expectations. The benchmark 2036 bond yield dropped to 6.74%, supported by lower global crude prices and sustained buying from state-run lenders and foreign investors.
Indian government bond prices extended their recovery on Thursday morning, marking the second consecutive day of gains. The benchmark 6.94% bond maturing in 2036 saw its yield fall by 3 basis points to 6.7436% by 11:10 AM IST. This move follows a period of pressure that had pushed yields to a three-week high earlier in the week.
The recovery is primarily linked to softening economic data from the United States. Recent reports showed U.S. producer prices unexpectedly falling by 0.3% last month, a development that led investors to reduce their expectations for further interest rate increases by the Federal Reserve. With futures markets now indicating a minimal chance of a July rate hike and a reduced probability for a September increase, global sentiment toward emerging market debt has improved.
Impact of Global Factors and Domestic Demand
Lower yields on U.S. Treasuries often provide relief to Indian debt markets by reducing the pressure on the rupee and domestic borrowing costs. Furthermore, Brent crude oil prices have dipped below $85 a barrel. This decline is significant for India, as it helps ease concerns regarding imported inflation, which is a major factor in the Reserve Bank of India’s monetary policy decisions.
Domestic interest has also remained robust. State-run lenders have purchased approximately ₹15,600 crore worth of bonds over the last three trading sessions, providing a strong floor for prices. Additionally, foreign investor participation continues to be a key theme. Since June 1, these investors have acquired over $4.2 billion in Fully Accessible Route bonds, largely fueled by market optimism regarding India's potential inclusion in the Bloomberg Global Aggregate Index.
Inflation Outlook and Market Indicators
Economic projections for domestic inflation have also provided some comfort to the market. Nomura analysts recently estimated that July inflation could track at 4.0% year-on-year, down from 4.4% in June. Looking further ahead, their forecasts for fiscal year 2027 place inflation at 4.6% and the current account deficit at 1.2% of GDP. These figures support the view that the Reserve Bank of India may maintain an extended hold on interest rates.
Technical indicators also reflect the current sentiment, with the benchmark yield now trading below its 21-day moving average. Accompanying this move, India’s overnight index swaps have also eased. The 1-year swap rate dropped 3.5 basis points to 5.8975%, while the 2-year rate fell by 6 basis points to 6.06%. Investors will continue to monitor U.S. economic updates and any shifts in central bank commentary, as these remain the primary drivers of bond yield volatility.