Indian Bond Yields Spike as US Fed’s Hawkish Tone Hurts Rate Cut Hopes — What to Expect from RBI Now?

Indian government bond yields have experienced an upward jolt recently, primarily influenced by the U.S. Federal Reserve's recent policy stance. The Fed's indications of a potentially slower pace of rate cuts than previously anticipated have dampened hopes in the Indian market, leading to adjustments in bond yields.

The US Fed's Hawkish Signals

The U.S. Federal Reserve recently lowered interest rates by 25 basis points, bringing the benchmark overnight rate down to a range of 3.75%-4.00%. However, during the post-decision press conference, Fed Chair Jerome Powell adopted a cautious tone regarding future rate cuts, stating that further easing in December was not a foregone conclusion. This contrasted with earlier market expectations of more aggressive rate cuts in 2025. Powell's comments reflected a struggle within the Fed to reach a consensus on the future path of monetary policy, given factors such as a slowing job market, slightly increased unemployment, and persistent inflation. This hawkish tilt from the Fed has had a ripple effect on bond markets worldwide, including India.

Impact on Indian Bond Yields

The change in expectations regarding the Fed's policy trajectory has directly impacted Indian bond yields. With the prospect of fewer rate cuts by the US Fed, the upward pressure on Indian bond yields has increased. This is because the differential between interest rates in the US and India influences foreign capital flows. If the RBI cuts rates more aggressively than the Fed, it could narrow this differential, potentially leading to outflows from Indian debt markets as investors seek higher returns elsewhere. On October 28, 2025, the yield on the benchmark 10-year note may move between 6.53% and 6.56%, a trader at a private bank said. The yield ended at 6.5464% on Monday, its highest closing level in a month.

RBI's Response and Future Outlook

The Reserve Bank of India (RBI) now faces a complex situation. While the central bank has previously signaled room for rate cuts as inflation remains benign, the Fed's hawkish stance adds a layer of complexity. The RBI needs to carefully balance supporting domestic economic growth with maintaining financial stability and managing capital flows. The RBI's monetary policy is primarily guided by domestic economic growth-inflation conditions and their outlook. However, monetary policy in advanced economies does impact markets.

Several factors could influence the RBI's upcoming decisions:

• Inflation: If inflation remains under control, the RBI might consider a rate cut to support economic growth.
• GDP Growth: The Indian economy is expected to grow at a solid pace. If growth falters, the RBI may be more inclined to ease monetary policy. The central bank recently lifted its economic growth forecast to 6.8%.
• Rupee Stability: The RBI has been actively intervening in the currency market to curb volatility and support the rupee. The central bank is prepared to intervene further until it settles at a stronger level.
• US-India Trade Deal: Expectations of a trade deal between the US and India, which could lower tariffs on Indian exports, are also influencing market sentiment. A reduction in tariffs could have a much smaller impact on the growth trajectory, potentially limiting future rate cuts.

Market Expectations

Market participants are closely watching the RBI's next moves. Some analysts believe that the Fed's recent actions give the RBI a green light to lower its policy rate in the upcoming Monetary Policy Committee (MPC) meeting. Others suggest the RBI will maintain its focus on domestic factors. Most market participants still expect a December rate cut, with some forecasting further easing in February to bring the repo rate to 5% after recent data showed inflation fell to an eight-year low.

Conclusion

The recent spike in Indian bond yields reflects the market's reaction to the US Fed's less dovish stance. The RBI faces a challenging balancing act as it navigates domestic economic needs and global financial conditions. The central bank's upcoming policy decisions will be crucial in determining the future trajectory of Indian bond yields and the overall economy.