The interest rate spread between Indian and US bonds has narrowed to its lowest level in nearly a year, supported by expectations of foreign capital inflows and a decline in oil prices.

⑴ India’s benchmark 10-year government bond yield fell to around 6.77% amid declining oil prices and continued market bets on inclusion in global indices. Meanwhile, the US 10-year Treasury yield remained steady at approximately 4.64%, narrowing the yield spread between the two countries’ benchmark sovereign bonds to about 213 basis points—the tightest level since early August last year. ⑵ Compared with a yield spread of about 270 basis points before the outbreak of the US-Iran conflict, the current narrowing is quite significant, reflecting the relative resilience of Indian bonds in the context of marginal external environment improvement and ongoing structural capital inflows. ⑶ The market widely expects that the Federal Reserve will raise interest rates in September, while surveys indicate the Reserve Bank of India is very likely to keep rates unchanged both in the upcoming week and for the rest of the year. The divergent monetary policy paths have not hindered the yield spread contraction trend. ⑷ Traders noted that if foreign buying momentum continues, the spread could further test the 200 to 210 basis point range. The subsequent trend will depend on the global liquidity environment, the actual pace of including Indian bonds in global indices, and the next move in oil prices.