Rupee plunge, surging swaps push India 10-year bond yield to 7% after nearly two years

Indian government bonds extended their selloff on Monday, closing out a rough financial year, on bets that a protracted Middle East war would upend the government's fiscal plans and raise interest rates after the rupee plunged past 95 per dollar.

The 10-year bond yield rose seven basis points to breach the 7% level for the ‌first time ⁠since July ⁠2024. The rupee plunged to a low of 95.21 against the dollar while stocks also tanked.

Bonds were caught in a sharp selloff across the country's markets that included surging swap ​rates, as investors weigh risks of the war in the Middle East widening further. That would pose significant challenges to economic growth and inflation for net energy ​importer India.


India's growth could be hit due to ⁠high global ‌commodity prices, evolving trade dynamics and capital flows, junior finance minister ​Pankaj Chaudhary ​said.

Depreciation in the rupee was likely to increase India's import ⁠bill, impacting its current account deficit, he said.

The rupee ​has moved past 95, and if the Middle East ​conflict escalates further, 100 per dollar is no longer a "tail risk", but a scenario markets will begin to worry about and even price in, Krishna Bhimavarapu, APAC Economist at State Street Investment Management, said.

The benchmark Brent crude contract was around $115 per barrel, up 60% in March, set to post its best monthly ‌gain ever, on supply worries.

India's overnight index swap jumped sharply, a trend which has been observed through the month, putting additional pressure on ​bonds.

The key ​one-year, two-year and ⁠five-year OIS rates are up 73-89 basis points in March.

"If oil continues to trade higher, the crude basket assumed by RBI in October policy at $70 per barrel ​will undergo significant revision," said Alok Sharma, head of treasury at ICBC, Mumbai.

"The swaps are already pricing in 50-100 bps rate hikes in the next one year. RBI will have to change their tone and adjust their view of lower for longer in a structured way to avoid sudden changes in tone and action."