India's 10-year government bond yield continues to rebound

The yield on India's 10-year government bonds has risen to around 7.20%, continuing its previous rebound after having touched a more than one-month low. Higher U.S. Treasury yields and concerns over increased bond supply have put pressure on bond prices. The yield on the U.S. 10-year Treasury jumped to near 5% after inflation data came in stronger than expected, weakening the relative attractiveness of Indian bonds and potentially limiting foreign capital inflows. Meanwhile, the government's large borrowing needs and continued issuance of benchmark 10-year bonds have increased the supply of securities, while tightening banking system liquidity may suppress domestic demand. Persistently high domestic inflation may also limit room for the Reserve Bank of India to cut rates, keeping borrowing costs elevated. However, last week’s 17% drop in crude oil prices eased external inflation risks and pressure on India’s balance of payments and government finances, which could offer more room for monetary easing by the Reserve Bank of India and put downward pressure on yields.