The finance ministry has flagged the rise in sovereign bond yields globally, warning that higher yields could have implications for India’s borrowing costs and the rupee.
“The rise in yield can cut both ways. Our bond yields can rise in tandem. Or, if they don’t, the spread compression can put pressure on the domestic currency,” the ministry said in its Monthly Economic Report.
The rise in global bond yields is significant given the growing competition for investment capital worldwide, including from developed economies seeking to finance fiscal spending and refinance existing debt, it said.
“This matters for the sustainable level of the current account deficit in developing countries with respect to the ease of financing,” the ministry said.
The ministry noted that the rupee had already depreciated by around 5% against the US dollar between February 27 and August 20. However, robust remittance inflows have provided an additional cushion to the external sector and strengthened the resilience of the overall balance of payments, it said.
Global bond yields have been rising amid concerns over fiscal positions and increased borrowing requirements. The US 10-year Treasury yield rose for a fourth consecutive session to 4.75% on Monday, its highest level since January 2025. The 30-year Treasury yield touched 5.3% last week, its highest level since 2007.
In Europe, the 10-year German government bond yield reached a 15-year high amid fresh military escalation between the US and Iran that pushed up oil prices. In India, the 10-year government bond yield was hovering around 7%, touching 6.95% on Monday.
The ministry’s warning comes as government bond supply is expected to increase significantly in the second half of the current financial year, potentially putting further upward pressure on yields.
Meanwhile, the finance ministry said a possible rise in global average inflation, driven by higher prices of electronic goods and food commodities, poses another challenge for the economy. “These will have implications for our monetary policy, domestic interest rates and the financing of the current account deficit,” it said.
The ministry said the domestic economy retained its vigour in July, with domestic demand remaining strong and the external sector stable. However, it cautioned that food prices, weather conditions and global uncertainties would need to be closely monitored in the coming months.