The yield on the 10-year Indian Government Securities (G-Sec) increased beyond 6.43%, moving up from the over three-year low of 6.3% recorded on May 5th. This shift was influenced by rising tensions with Pakistan, which undermined the perceived safety of Indian bonds. In retaliation to terrorist activities in Indian-administered Kashmir, Indian forces launched strikes within Pakistani territory, which led to further reciprocal threats from both nations. This geopolitical instability jeopardized the relative safety of Indian bonds, which had previously benefited from a robust economy and a stable currency, attracting significant investment into rupee-denominated debt markets. Despite this uptick, the yield remained 25 basis points lower compared to the beginning of the year.
The Reserve Bank of India (RBI) responded with consecutive reductions in its benchmark repo rate, which had been held at a four-year peak of 6.5% for a full year, aimed at curbing the slowdown in domestic economic growth. Additionally, the central bank executed a series of liquidity injections to support commercial banks. This move came after efforts to defend the rupee led to a depletion of domestic reserves and tighter financing conditions, prompting the central bank to engage in G-sec purchases.
