10-year bond yield may trade in 6.60-6.90% range over the next month: PGIM India MF's Puneet Pal

India's benchmark 10-year government bond yield is expected to trade in a range of 6.60% to 6.90% over the next one month, according to Puneet Pal, Head-Fixed Income at PGIM India Mutual Fund, who believes yields are unlikely to sustain below 6.60% despite their recent sharp decline.

Pal expects the Monetary Policy Committee (MPC) to raise interest rates in the second half of FY27 to keep real rates positive, even though average CPI inflation for FY27 is now expected to remain below 5%.

"Though bond yields have fallen sharply, we do not expect the 10-year bond yield to sustain below 6.60%, given that central banks across the world have been hiking rates and monsoons continue to be deficient, even as the overall rainfall deficit has reduced," he said.

Short end of yield curve remains attractive

Pal continues to favour the short end of the yield curve, supported by expectations of improved banking system liquidity amid potential FCNR inflows. A possible delay in rate hikes, with Brent crude sustaining below $90 per barrel, could also support shorter-duration bonds.

Investors with a short-term investment horizon can consider allocating to the 1-3-year maturity segment of the yield curve, he said.

Bond yields consolidate after sharp June fall

Indian bond yields consolidated with a steepening bias during the first fortnight of July following the sharp decline in yields witnessed in June. The benchmark 10-year bond yield declined by 4 basis points, while yields on longer-duration bonds rose by 1-2 basis points.

Meanwhile, geopolitical tensions returned to focus after the ceasefire in the Middle East ended and the US conducted airstrikes on Iran. Brent crude rebounded and ended the week at around $76 per barrel, after touching $80 during the week.

Foreign portfolio investor flows into Indian debt remained positive, with more than $900 million coming in during the first 10 days of July. Equities, meanwhile, witnessed FPI inflows for the first time in four months.

Monsoon deficit narrows, but kharif sowing remains weak

The cumulative rainfall deficit improved to 15% of the long-term average as of July 10, 2026. On a regional basis, rainfall remained deficient in Northeast, South and West India, while it was normal in Central India.

Of the country's 36 meteorological subdivisions, 12 received deficient rainfall, 19 recorded normal rainfall and five witnessed excess rainfall.

Kharif sowing, however, continued to lag last year's levels, with total acreage down 21% year-on-year. Rice sowing was 13% lower at 6 million hectares, while pulses acreage declined 22% to 3.7 million hectares.

Coarse cereal acreage was 16% lower at 6 million hectares, while oilseeds acreage fell 39% to 6.6 million hectares. Cotton acreage was down 23% at 6.3 million hectares. Sugarcane was an exception, with acreage rising 1.5% to 5.8 million hectares. The sowing data is as of July 5.

Reservoir levels, however, offered some comfort. Overall basin and reservoir levels were 7.6% above the long-term average for the week ended July 10.

Banking liquidity remains in surplus

Deposit growth accelerated to 13.3% year-on-year as of June 30, 2026, improving from 12% as of June 15, while credit growth remained robust at 18.6%.

According to Pal, deposit growth appears to be supported by FCNR flows. Banking system liquidity remained in surplus, with overnight rates trading near the Standing Deposit Facility (SDF) rate.

Money market yields, however, moved higher over the past week. Three-month bank certificates of deposit were quoted around 6.70%, after having touched a low of 6.30%.

The Overnight Index Swap (OIS) curve remained broadly flat in July so far. The one-year OIS yield was unchanged from June-end levels at 5.77%, while the five-year OIS yield declined by 2 basis points.

Rupee remains under pressure

Despite the broad-based decline in bond yields in June and the sharp fall in crude oil prices, the Indian rupee remained under pressure, trading above the 95-per-dollar mark.

The rupee ended the week at 95.32 against the US dollar, compared with 94.66 at the end of June. The strength in the US Dollar Index could be one of the factors behind the currency's weakness, according to Pal.

The rupee's performance, however, has been contrary to expectations of appreciation following measures announced by the Reserve Bank of India in June to attract capital flows.

Global bond yields stay elevated

Global bond yields remained elevated amid renewed geopolitical tensions in the Middle East and concerns about the potential impact on crude oil prices.

The US Dollar Index has strengthened since the Federal Open Market Committee meeting and remained above the 100 mark, contributing to some correction in precious metals.

The US 10-year Treasury yield ended the week at 4.56%, up 10 basis points since the beginning of July. German and Japanese government bond yields also moved higher.

Against this backdrop, Pal expects Indian bond yields to remain range-bound in the near term, with the 10-year benchmark yield likely to trade between 6.60% and 6.90% over the next month, while the shorter end of the yield curve could continue to offer opportunities for investors with a short-term horizon.