India’s 10-year Government Security yield could settle between 6.75 per cent and 7 per cent by March-end 2027, according to the State Bank of India. Experts said the rupee might also get stronger as the Dollar Index weakens. The bank noted that government measures helped manage the country's borrowing programme effectively.
India’s 10-year Government Security (G-Sec) yield could settle in the range of 6.75 per cent - 7 per cent by March-end 2027 and the rupee will also have an appreciating bias with Dollar Index weakening post US mid-term elections, according to State Bank of India’s economic research department (ERD).
The ERD, in its Ecowrap report, attributed two reasons for its 6.75 per cent - 7 per cent estimate for the 10-year G-Sec yield -- first, 200-225 basis points (bps) spread over US 4.75 per cent yield and second, historical analysis of the spread between Indian 10-year G-Sec and Repo rate reveals that the most plausible situation is a 100-bps spread between the two.
“So, in case of a tightening monetary policy, even if the repo rate is increased by 50 bps to 6 per cent, we believe that yield would still be in the range of 6.75 per cent to 7 per cent by March 2027 as per the historical analysis.
“However, a short-term flare up till 7.6 per cent is not ruled out as may be certain section of market players in India have been caught off guard when the yields topped 7.15 per cent-7.2 per cent and hence now cutting their positions aiding in a yield spike,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.
The ERD economists assessed that there could be an excess supply of G-Secs of approximately ₹1.52 lakh crore. However, unlike the US (the ERD’s demand-supply assessment suggests $304 billion excess supply of US treasury consistent with US fiscal deficit at 6.15 per cent of GDP), the Indian government has already undertaken measures to manage its borrowing programme through bond switches and buybacks, which has brought down the gross borrowing requirement by ₹1.23 lakh crore and could be cut further.
They noted that the 10-year G-sec yield spread between India and US is currently hovering at around 250 bps with the India’s yield at roughly 7.43 per cent and the US yield at 4.93 per cent.
Past data (since 2019) indicate that the spread of 200-300 bps is the most possible scenario. In this regard, as per the ERD’s calculation India’s 10-year G-sec yield could settle in the range of 6.75 per cent - 7 per cent by end March 2027.
The ERD economists observed that although US Treasury yields have moderated from their recent highs and are currently hovering around 4.9 per cent, the underlying dynamics suggest such yields could remain elevated for some time now from its historical levels.
“We believe that US Treasury yields could settle at broadly around 4.75 per cent level, for some time. However, a short term blow up to 5.25 per cent-5.35 per cent is not ruled out,” they said.
Expecting the US mid-term elections could deliver a verdict in favour of Democrats, who, as per historical trends, follow a policy of fiscal prudence, the economists said the Rupee will also have an appreciating bias with Dollar Index weakening post November 9th .
In the unlikely scenario of no corrective steps (to contain borrowing requirements) being taken, the US may head towards a deeper crisis with higher fiscal deficit and accumulated debt, they cautioned.