India’s sovereign bonds had been in a sweet spot over the last two years or so  | Photo Credit: iStockphoto

The Gulf war — with its far-reaching impact on supply and prices of critical commodities, besides crude oil and gas — has thrown global bond markets into turmoil. Sovereign bond yields in most large economies have risen 20-60 basis points since the war began on fears of rising inflation and widening government deficits. India’s 10-year G-Secs too moved to 7 per cent on Monday, gaining more than 30 basis points over the past month. Rising yields raise the cost of financing large debts accumulated by countries since Covid, besides spiking market interest rates and creating difficulties for borrowers.

India’s sovereign bonds had been in a sweet spot over the last two years or so. Thanks to controlled inflation, a stable rupee and steady foreign inflows following the inclusion of Indian G-secs in global bond indices, yields declined gradually. The Reserve Bank of India’s (RBI’s) liquidity infusion through open market operations and dollar-rupee swap in the first two months of this calendar year enabled yields to drift lower towards 6.2 per cent by February. But with crude oil prices going past $100 a barrel mark and the rupee losing over 4 per cent since the beginning of the war, the fear of imported inflation is pushing G-sec yields up, along with that of other sovereign bonds. It didn’t help matters that foreign portfolio investors pulled out close to ₹8,500 crore from the debt market this month. They had been net buyers until the first two months of this calendar year.

Rising yields pose challenges on many fronts. The Centre and States will face a higher debt-service burden. Together, they held almost ₹188 lakh crore of outstanding debt as of last September-end. The RBI, as the manager of government debt, has its task cut out to keep yields under check. The central bank will be keeping a wary eye out on the developing fiscal situation this year. Tax revenues could come under pressure if the war doesn’t end soon as growth is bound to suffer.

Banks face treasury losses in their marked-to-market bond portfolios which will dent their bottomlines. Increasing G-Sec yields will also influence other market instruments. Rates on the one-year overnight index swaps have already risen almost 70 basis points since the beginning of the war, pointing towards the market’s expectation that interest rates in the economy are headed north. Most central banks are, however, in wait-and-watch mode, despite the heavy turbulence in bond markets. Central banks of the US, European Union, Japan and England maintained status quo in their latest policy decisions, although the war has stoked fears of higher inflation. The RBI faces a piquant situation in the upcoming monetary policy review next week. The choices are difficult but the central bank could choose status quo and watch the developing situation like its peers elsewhere, before acting.

Published on March 30, 2026