India’s sovereign bond yields rose sharply this week as global yields surged more than 50 basis points since the West Asia conflict began, putting pressure on the domestic debt market. The benchmark 10-year government bond yield climbed toward key psychological levels as foreign investors reduced exposure.
The U.S.-Israel war with Iran and the closure of the Strait of Hormuz have driven up oil prices and inflation expectations worldwide. Rising U.S. Treasury yields have pulled emerging market bonds higher, making Indian government debt less attractive to foreign portfolio investors who have been net sellers throughout 2026.
Long-duration gilt mutual funds have seen reduced investor interest as rising yields erode returns on existing holdings. Fund managers said clients are shifting toward shorter-maturity instruments until rate volatility subsides. The Reserve Bank of India has intervened in currency markets to limit rupee depreciation but has not signaled an immediate policy shift.
Analysts at Bank of America and other institutions warned the challenging fiscal environment could persist if Middle East tensions continue. India’s import bill for crude oil has increased, widening the current account deficit. Domestic banks holding large government bond portfolios face mark-to-market pressures on their treasury books.
Bank of America and other institutions have warned that foreign portfolio outflows could continue if Middle East tensions persist. India imports more than 80 percent of its crude oil requirements, making the economy sensitive to price spikes linked to the Strait of Hormuz closure since late February.
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Sources:
https://www.business-standard.com/