Indian 10-year bond yield may ease to 6.75-7 pc by Mar despite possible rate hike SBI Research

Mumbai, Nov 1 (PTI) Indian government bond yields could ease to 6.75-7 per cent by March 2027 even if the Reserve Bank of India (RBI) increases the benchmark interest rate by 0.50 per cent, as lower borrowing and historical yield trends are expected to support the market, according to a report.

    "As per our calculation, India's 10-year G-sec yield could settle in the range of 6.75 per cent-7 per cent by end March '27," the SBI Research report said on Sunday.

    The 10-year government security yield is currently at around 7.43 per cent, while the spread between Indian and US 10-year government bond yields is hovering at around 2.50 per cent.

    SBI Research said past data since 2019 indicate that a spread of 2-3 per cent is the most likely scenario.

    It said that even if the repo rate is increased by 0.50 per cent to 6 per cent, the 10-year yield would still remain in the range of 6.75-7 per cent, based on historical analysis of the spread between the Indian 10-year government security yield and the repo rate.

    The report, however, cautioned that a short-term flare-up in yields to 7.6 per cent is not ruled out, as certain market participants were caught off guard when yields crossed 7.15-7.2 per cent and are now cutting their positions, contributing to a spike.

    SBI Research estimates an excess supply of around Rs 1.52 lakh crore in the Indian government bond market, with total supply of Rs 21.40 lakh crore against estimated demand of Rs 19.88 lakh crore.

    The government has already undertaken measures to manage its borrowing programme through bond switches and buybacks, which have brought down the gross borrowing requirement by Rs 1.23 lakh crore and could be reduced further, it said.

    "However, unlike the US, the Indian government has already undertaken measures to manage its borrowing programme through bond switches and buybacks, which have brought down the gross borrowing requirement by Rs 1.23 lakh crore and could be cut further," the report said.

    On the global front, SBI Research expects the US 10-year Treasury yield to settle around 4.75 per cent, although a short-term spike to 5.25-5.35 per cent cannot be ruled out.

    The US 10-year Treasury yield is currently hovering around 4.93 per cent.

    The report said the underlying dynamics suggest that yields could remain elevated for some time due to substantial government borrowing requirements and the mismatch between Treasury supply and investor demand.

    It estimated that the US government would need to reduce its borrowing or expenditure by approximately USD 100-120 billion for the 10-year yield to sustain at 4.75 per cent. A further reduction of around USD 200 billion would be required for yields to move towards 4.5 per cent.

    The report also highlighted the impact of rising yields on the US Federal Reserve's balance sheet, with unrealised losses on its Treasury holdings increasing by USD 26.3 billion between December 2025 and June 2026.

    The Fed's unrealised Treasury losses rose from USD 535.3 billion in December 2025 to USD 561.5 billion in June 2026, as the US 10-year Treasury yield increased from 4.18 per cent to 4.44 per cent during the period.

    SBI Research said higher yields reduce the market value of Treasury securities held by the Fed, thereby increasing unrealised losses.

    Separately, the report flagged a widening mismatch between the supply of US government securities and investor demand, estimating an excess supply of USD 304 billion.

    The mismatch was significantly lower at around USD 140 billion in 2015, when the US fiscal deficit stood at 2.5 per cent of GDP, compared to an estimated 6.15 per cent currently.

(This story has not been edited by THE WEEK and is auto-generated from PTI)