High inflation stops India yield curve from steepening

Expectations of a steepening bond yield curve in India’s financial landscape during the latter half of the year are diminishing, driven by rising oil prices that have reignited inflation concerns. Despite lower supply, shorter-dated yields have not fallen, keeping the government bond yield curve relatively flat.

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Currently, the four- and five-year yields in India stand at around 7.25%, while the 10-year benchmark bond yield is at 7.23%. A steeper yield curve usually signifies investor expectations of higher compensation for the risk that increasing inflation could erode returns from owning longer-term bonds.

A flat yield curve, conversely, reflects uncertainty regarding monetary policy outlook and liquidity conditions. The recent oil price surge has raised fresh inflation concerns, hindering the short-end of the yield curve from decreasing as initially anticipated.