The yield gap between India’s 10-year government bond and the US 10-year Treasury note has narrowed significantly, falling to just around 1.88% — a far cry from the 6.35% spread seen in 2014. The development comes amid a steady drop in Indian bond yields driven by easing inflation, a dovish monetary policy stance from the Reserve Bank of India (RBI), and improving macroeconomic fundamentals.
The benchmark Indian 10-year bond yield was last quoted at 6.3014%, compared with 6.3069% in the previous session, while the US 10-year Treasury yield declined 5.4 basis points to 4.42%. This compression in yield differential has implications for foreign investor interest in Indian debt, particularly as US yields have risen on account of persistent fiscal concerns and policy uncertainties.
Suresh Darak, Founder of Bondbazaar, noted that the narrowing yield gap makes Indian government securities less attractive to foreign institutional investors (FIIs), who are now seeking higher risk-adjusted returns elsewhere
“We should expect lesser FII inflows, and potentially elevated outflows unless the yield gap widens again,” he said. However, Darak emphasized that India’s stable economy and robust forex reserves of around $700 billion cushion the impact of any outflows.
Adding to the optimism, Darak observed that the RBI’s recent 50 basis point (bps) repo rate cut to 5.5% may mark the end of the rate cut cycle.
“The yield curve has steepened serving the regulator’s purpose as low short-term rates fuel growth, while high long-term rates reflect growth expectations. Conditions are stable now, and from here on we should expect rate hikes sometime in the future. Bond investors should consider shorter-duration corporate bonds (1–2 years), as long-duration bonds may underperform in a steepening yield curve environment,” he added.
Despite concerns over diminishing yield spreads, Kruti Chheta of Mirae Asset Investment Managers sees the trend as a reflection of improved fundamentals in emerging markets (EMs), especially India.
“This narrowing is not merely a result of reduced risk premiums but highlights India’s fiscal discipline, manageable debt levels, and inflation staying within the central bank’s comfort range,” she said.
Chheta contrasted India’s improving macro picture with the US, where the fiscal deficit is at 6.4% of GDP, debt-to-GDP is around 120%, and $9 trillion in debt is due for refinancing in 2025.
“India has consistently met its fiscal consolidation targets over the past three years, with a fiscal deficit goal of 4.4% set for FY26. The debt-to-GDP ratio stands at a more manageable ~82%, and inflation has remained stable in the 4–4.5% range — well within the central bank’s comfort zone. Furthermore, government borrowings have declined year over year, reducing the supply of government securities and contributing to a favorable bond market environment,” said Chheta.
Bond Market Outlook
Puneet Pal, Head of Fixed Income at PGIM India Mutual Fund, expects another 25 basis point repo rate cut in the upcoming MPC meeting. He forecasts the yield curve to remain steep, with the 5–10 year segment likely to outperform.
According to Chheta, while comparisons are often drawn between Indian government bonds and US Treasuries, the context becomes more compelling when looking at yields across other Asian economies such as China, Vietnam, and Thailand, where benchmark rates hover around 2–3%—significantly lower than India’s.
“Indian fixed income, therefore, continues to present an attractive proposition, especially in light of structural reforms and long-term growth prospects. Since 2014, India’s benchmark yields have declined from ~7.6% to 6.5%, and they are expected to trend lower as economic growth accelerates and the country captures a larger share of global GDP,” Chheta said.
In the near term, the Indian bond market may witness subdued foreign interest, but improving domestic fundamentals, policy stability, and a favorable interest rate environment continue to make it attractive — especially for long-term investors seeking stable returns amid global uncertainties.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
