Current G-sec yields are attractive, and some investors are finding value in government bonds and selective buying interest is visible, Shashi Dhar, chief general manager – treasury and global markets at Bank of Baroda, said in an interview. He added that buying is being observed as yields have fallen past a certain point, indicating that those levels are appealing.
Since the start of the West Asia conflict, the yield on the 10-year benchmark bond has risen by as much as 47 bps to 7.13%, driven by inflation concerns. Currently, it is trading around 7%.
Market Pricing
The market appears to have priced in the possibility of further policy tightening over coming quarters. Dhar believes that upside in yields from current levels may remain relatively contained unless there is a material adverse inflation or geopolitical shock. “Going ahead, I do not see benchmark yield going much higher, as most possibilities of rate hikes have already been factored in at the current levels. However, any change in policy stance emphasising a more aggressive policy from the RBI in the June meeting may bring some short-term pressure on benchmark bonds.”
Though the market has started expecting rate hikes earlier, Dhar does not expect the central bank to consider rate hikes at least in H1. “Even if global factors such as higher oil prices push up inflation, it should remain within the target band. A rise to around 5% therefore doesn’t present a strong justification for a rate hike.”
However, a small segment of the market expects a rate hike to address inflationary pressures and stabilise the currency.
Defending the Rupee
He added that there are different slew of capital inducing measures that the RBI may take that can further provide strength to the rupee. “A raise in interest rate for only strengthening the rupee will only provide a temporary respite since demand for dollar remains high in India due to its import requirements. Also, with the US 10-year around 4.50% and given currency premium, it’s unclear whether a rate hike would achieve the desired effect. The RBI will weigh those considerations before deciding on any move.”
The Indian rupee nearly reached 97 on May 20 but rebounded strongly following RBI intervention and a decline in oil prices. On Friday, it settled at 95 per dollar. In 2026, the currency is down 5.7%.
Reports indicate that the government and the RBI are considering measures including reducing taxes on FPI investments in bonds and approaching state-run banks to issue foreign currency bonds, among other options. The market also expects that the RBI may deploy the 2013 playbook to support the currency.