|
Getting your Trinity Audio player ready...
|
India’s bond market is seeing a repeat. Between 2013 and now, there have been three episodes, each of which has seen shifting US Treasury yields impacting Indian G-Sec yields, the rupee, and FPI flows and prompted the RBI to step in and take measures. The auction on July 9th for the US 2026 30-year note, which was set at a yield of 5.058% [1] (the highest it has been in the last 20 years), is the latest chapter in this story. This article discusses what each of these previous episodes looked like and how similar and how unlike this one is.
Start investing with just ₹10K & grow your wealth with fixed return opportunities.
Invest Now
How US Bond Yields Affect India: The Basics
Three things happen in India when US Treasury yields increase.
First, the yield spread, the difference between the US and India’s borrowing costs, decreases. Some foreign investors sell Indian bonds because they see the extra return shrink. By December 2024, this yield spread had closed to 224 basis points [2], or 2.24%, the smallest spread since 2005.
Second, the Indian government bonds are a part of JPMorgan’s and Bloomberg’s emerging market bond indices, and large international bond funds buy or sell these bonds based on fixed allocation rules. These funds had positive effects on Indian bonds and created a new steady demand that didn’t exist before 2024.
- The Global Bond Shockwave: Why Indian Investors Shouldn’t Ignore 20-Year High US Yields
- Indian Companies Raise ₹15,960 Crore Via Bond Issuances as Debt Market Momentum Builds
- AI Conquered the Stock Market: Why the Bond Market Is Next
Third, because of the currency hedging costs and a stronger dollar, a yield still attractive has little effect to persuade some to hold Indian bonds.
An effective way to see the pressure India faced during these episodes is to look at how much of the fall was stopped when the Reserve Bank of India spent its foreign exchange reserves. If the RBI had to spend ~$90 billion [3] to keep the rupee from falling, the rupee is just as pressured as if it had fallen with no intervention; the pressure was simply absorbed differently.
Four US Yield Episodes That Hit Indian Bonds (2013-2026)
2013: The Taper Tantrum
A hint to slow Fed purchases caused the rupee to fall nearly 20% by September, hitting a record low of 68.8 to the dollar [4]. India’s 10-year bond also jumped to 9.17% [5]. With a large current account deficit of 4.8% of the GDP [6], India was one of the least favored markets for investors, also earning a place in Morgan Stanley’s “Fragile Five.” The RBI, with the new Governor Raghuram Rajan, introduced a special deposit scheme for Indians abroad, in which banks received a subsidized exchange rate, and it brought in $26 billion on its own and $34 billion in total [7]. This is a rescue plan the RBI has executed, in different forms, twice since then.
2018 and 2022: US Rate Hike Cycles
The same pattern emerged in October 2018 with the Indian Rupee hitting 74.48 to the Dollar [8], as US yields crossed 3%. However, the worst test came one year later in 2022 when the US Fed raised interest rates more aggressively than in the previous 40 years. Currency stress analysts say that the rupee was under just as much pressure in 2022 as in 2013, the difference being that the RBI intervened and spent nearly $90 billion between June and October to keep it from depreciating, more than twice the $40 billion spent in 2013.
2023–24: Index Integration
From June 2024, JPMorgan added Indian government securities to its Government Bond Index–Emerging Markets, gradually increasing India’s weight to 10% by March 2025. Bloomberg also included Indian government bonds in their Emerging Market Local Currency Index from January 2025. Together, it is estimated that $25–30 billion of foreign capital was added to Indian government bonds because of this, signifying a more stable investor base that was absent during the 2013 and 2022 crises, when foreign capital in Indian government bonds was highly volatile.
2025-26: The Ongoing Situation
By the end of 2024, the India-US yield spread had narrowed to its lowest level in the last twenty years. 2026 was marked by increased volatility: Foreign investors withdrew ₹1.92 lakh crore from Indian equities in the first four months of 2026 [9] (₹1.17 lakh crore in March alone). The rupee depreciated to a historic low of ₹96.84 per USD on May 20, and India’s 10-year bonds yield crossed 7.12% in the backdrop of US 30-year bonds crossing the 5% threshold. In response to this, the RBI announced major reforms on June 5. Among other things, the RBI opened certain government bonds to completely unrestricted foreign investment, removed tax on foreign investors’ bonds, and implemented cheaper currency hedging with full reimbursement of hedging costs under a special deposit scheme for NRIs. MUFG research analysts stated this was the most extensive rescue effort since 2013, but will likely be less effective since the US rates are higher now than in the earlier period, making the incentives less attractive.
Episode Comparison
| Episode | What Triggered It in the US | India’s 10-Year Bond Yield | Rupee | RBI’s Response |
| 2013 Taper Tantrum | Fed signals slower bond buying. | 7.4% → 9.2% | Fell 20% (May–Sep), to 68.8/$ | Special NRI deposit scheme: $34bn raised |
| 2022 Rate-Hike Cycle | Fastest Fed rate hikes in 40 years | Stayed elevated, held in check | Held steady via RBI intervention | $90 billion in reserves spent defending rupee |
| 2023–24 Index Inclusion | Not a shock — a structural change | Eased on steady new demand | Supportive | JPMorgan/Bloomberg inclusion: $25-30bn inflow |
| 2026 (current) | US 30-year Treasury yield auctioned at 5.058%, highest since 2007 | 6.7% → 7.1% → <7% | 89.9 → 96.84 → 94.4 | Bond-market access + tax relief + hedging support: $40bn estimated (MUFG) |
What’s Different This Time, and What Isn’t
Index inclusion has definitely brought a more consistent stream of foreign investment, unprecedented in both 2013 and 2022. That’s part of the reason that, with US interests at an all-time high, it was recorded that in June 2026 alone, ₹39,640 crores were invested by foreign entities in Indian government bonds. The foreign money flowing into Indian government bonds doesn’t wait for the interest yield to close; it follows the rules set by the index it tracks.
This influx of capital does not mean the Indian bond market is shielded from the pressure of rising US Treasury yields. Elevated US Treasury yields create competition for the available global capital, and, as in 2013 or late 2024, Indian bonds will be subject to the same pressure. However, for the moment, this pressure is being countered by two factors: the steady inflow of index-linked investment and the additional incentives offered by the RBI’s June 2026 reforms. Both have limitations. According to MUFG, India’s special deposit scheme for NRIs is a less attractive deal today compared to 2013, simply because US interest rates are so much higher.
A fair conclusion is that India’s bond market today has more support than in 2013: greater access for foreign investors, two major index participations, and better taxation policies. However, none of that has removed the basic sensitivity to US bond yields that every one of these episodes has shown. The real question for the remainder of 2026 is whether the new, more consistent demand will be enough to not just outperform the market in the next strategic months but to continue to do so until US yields rise, with the 30-year yield already hitting 5.20% this year. The data from June is promising, but it is not enough yet to draw a conclusion.
Frequently Asked Questions
It’s about greater risk equaling greater reward. In the past, foreign investors wouldn’t bring their capital to India unless India offered significantly higher interest rates compared to the US. The yield spread is the gap between US borrowing costs and Indian borrowing costs.
The Shrinking Yield Spread: Recently, this spread has plummeted to just 2.24%, the lowest since 2005. With such a low spread, investment funds would rather not take the risk and instead bring their capital back to the US from India.
Exactly. Think of currency like a market seesaw. When US bonds pay high interest, global investors must buy US Dollars to invest in them. This massive global demand makes the Dollar stronger.
At the same time, as investors sell off Indian assets to move their money to the US, they dump Rupees. More demand for Dollars and less demand for Rupees is the exact reason why the exchange rate faces pressure, pushing the Rupee to historic lows (such as hovering around the ₹95 per Dollar mark).
A global bond index is a curated “basket” of trusted government bonds from various countries. Just like the Nifty 50 tracks top stocks, these indices track reliable government debt. Multi-trillion-dollar global pension funds and institutions use them to automatically invest their cash.
The inclusion of India’s G-Secs into indices of premier financial institutions like JPMorgan and Bloomberg means that India is now a member of the global financial elite. Since international funds have to legally adhere to these indices, it means that a lot of funds now invest a lot of money into Indian government bonds.
Even if you don’t buy government bonds directly, this structural shift protects your wallet in three main ways:
A More Stable Rupee: Because this automated index money is bound by strict rules, foreign funds can’t easily panic and pull out during global shocks. This steady cash cushion prevents the Rupee from crashing.
Stable Interest Rates & Loans: The influx of foreign funds reduces the cost of borrowing for the Indian government. Eventually, this cost, as a result of market forces, is passed to Indian retail consumers in the form of more affordable and predictable interest rates.
Accurate Mutual Fund Pricing: To welcome foreign investors, India revamped its electronic trading system. This removed “stale pricing,” creating live pricing and thus a more accurate picture of your debt mutual funds’ potential performance and investment returns.
Sources
- https://www.bloomberg.com/news/articles/2026-07-09/us-30-year-bond-auction-set-to-draw-highest-yield-in-20-years
- https://www.business-standard.com/finance/investment/narrowing-of-us-indian-10-year-treasury-yields-to-impact-fpi-inflows-124121901194_1.html
- https://www.business-standard.com/opinion/columns/ten-years-since-taper-tantrum-123091501349_1.html
- https://documents1.worldbank.org/curated/en/109101468306526474/pdf/868120PUB0saef00Box385183B00PUBLIC0.pdf
- https://www.business-standard.com/article/reuters/10-year-bond-yield-hits-five-year-high-as-rupee-falls-113081900606_1.html
- https://timesofindia.indiatimes.com/business/india-business/current-account-deficit-widens-to-record-4-8/articleshow/20794271.cms#:~:text=This%20story%20is%20from%20June,the%20full%202012%2D13%20fiscal
- https://sbi.bank.in/documents/13958/14472/01042026_Ecowrap_20260330.pdf/b4b70331-4138-ef7d-fa79-5a6dd00bc6a4?t=1775022390355
- https://www.ndtvprofit.com/business/rupee-vs-us-dollar-inr-vs-usd-currency-exchange-rate-rupee-crashes-to-new-all-time-low-of-74-48-1930300-10420044?utm_source=chatgpt.com
- https://www.business-standard.com/markets/news/fpis-pull-out-60-847-crore-in-april-2026-outflows-hit-1-92-trillion-126050100171_1.html
Disclaimer
Fixed returns do not constitute guaranteed or assured returns. Investments in corporate debt securities and municipal debt securities/securitized debt instruments are subject to credit risks, market risks, and default risks, including delay and/or default in payment. Read all the offer-related documents carefully. This blog/article should not be construed as financial advice or as an offer or recommendation to buy or sell any security or any products/services of/on GoldenPi or any product/services of its third-party client(s). For a detailed calculation of YTM, visit our website. T&C’s Apply.
