India’s benchmark 10-year government bond yield surged to a more than 20-month high on Monday, as rising crude oil prices and a weakening rupee stoked fears of imported inflation and potential monetary tightening.

The yield on the 10-year benchmark government security (G-sec) climbed to around 6.99% during the session, marking its highest level since July 2024, as the Indian currency slid to record lows.

The Indian rupee breached the 95-per-dollar mark for the first time, touching an all-time low of 95.12 against the US dollar, despite recent steps by the Reserve Bank of India (RBI) to tighten banks’ forex exposure norms.

The rupee, now among the weakest Asian currencies, has depreciated over 4.4% since the onset of the Iran conflict, amplifying concerns over India’s external balances. The sharp currency decline, combined with a surge in crude oil prices, has intensified fears of a widening current account deficit (CAD) and rising inflationary pressures.

Global oil markets have been a key trigger. Brent crude oil prices have surged more than 50% in March, from around $75 to $115 per barrel, marking one of the steepest monthly increases on record. Prices have remained elevated above $100 per barrel amid geopolitical tensions, with supply disruptions through the Strait of Hormuz, a critical artery handling nearly 20% of global energy flows, adding to uncertainty. The spike has heightened fears of imported inflation spilling over into the domestic economy.

Yields seen elevated at 6.75–7.25% in H1FY27

According to a report by YES Bank, India’s 10-year G-sec yield is likely to remain elevated in the 6.75%-7.25% range in the first half of FY27, reflecting persistent pressures from global yields, fiscal dynamics, and continued rupee weakness.

“Given the above fiscal issues, continuing pressure from global yields and a likely continuing depreciation pressure for the INR, India 10-year yield could be in the range of 6.75-7.25% in H1FY27,” the report highlighted.

The report noted that yields have been trending higher since the Union Budget, driven by a large government borrowing programme, tight banking system liquidity, slower asset growth in insurance companies, and reduced foreign portfolio investor (FPI) participation amid currency depreciation.

While the RBI’s open market operations (OMOs) have helped ease liquidity pressures stemming from forex interventions, the broader yield curve has steepened following the end of the rate-cut cycle. Elevated borrowing requirements are expected to keep yields under upward pressure, it said.

West Asia crisis alters bond market dynamics

The ongoing West Asia crisis has materially altered the dynamics of India’s bond market. Rising global yields, particularly US Treasury yields, have reduced the relative attractiveness of Indian debt for foreign investors. At the same time, the weakening rupee and concerns over a widening CAD have dampened foreign inflows into the sovereign bond segment.

The report also highlighted a strong correlation between crude oil prices and domestic bond yields, given the impact of higher energy costs on inflation and fiscal balances.

In response, the government has sought to cushion the impact by cutting excise duties on petrol and diesel by ₹10 per litre, while increasing export duties on select fuels to offset part of the revenue loss. However, these measures are expected to result in a net fiscal hit. Estimates suggest a potential annual revenue loss of around ₹1.3 lakh crore, alongside additional pressures from higher fertiliser and LPG subsidies.

Some relief may come from the ₹1 lakh crore Economic Stabilisation Fund announced earlier, but analysts estimate the overall fiscal impact of elevated oil prices could range between 0.2% and 0.5% of GDP, depending on how long the crisis persists.

Against this backdrop, prospects of further rate cuts by the RBI appear limited, with markets increasingly pricing in the possibility of a policy shift if inflationary pressures intensify.

In the near term, bond yields are expected to remain elevated, although any de-escalation in geopolitical tensions, particularly around oil supply routes, could provide some relief to both the currency and debt markets, the YES Bank report noted.

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