The yield differential between India's 10-year government bonds and US Treasuries has significantly narrowed, creating challenges for India's financial landscape. On Wednesday, the spread was 2.16 percentage points, just above a 22-year low of 1.89 percentage points recorded in May 2025. This compares to a 2.195 percentage point spread at the end of August 2025 and 2.42 percentage points at the end of December 2025. This reduction in the premium offered by Indian bonds makes them less appealing to global investors when compared to safer US assets.
This narrowing gap is partly attributed to a relatively weaker demand for long-term capital in India, as noted by Dhananjay Sinha, co-head of research and equity strategy at Systematix Institutional Equity. He points out that fewer Indian corporates are raising long-term debt for capital expenditure and other long-gestation projects, in contrast to a boom in long-term investments in the US, particularly in artificial intelligence-related projects. Historically, the yield spread between India and the US has averaged 3.95 percentage points over the past 10 years and 4.5 percentage points over the past 20 years, indicating the current spread is significantly below its historical average.
The diminishing yield premium has several implications for India. It can moderate foreign portfolio inflows into Indian equities and debt, put pressure on stock valuations, and dampen risk appetite, especially in sectors reliant on abundant liquidity and low interest rates. For instance, the spread between the Indian 10-year government bond and the US 10-year government bond declined by 26.5 basis points over the past year. Analysts like Uttam Srimal of Axis Securities and Karki of ICICI Securities highlight that higher US yields make emerging market equities, including India's, relatively less attractive, potentially delaying significant foreign capital flows. This situation also complicates the Reserve Bank of India's ability to manage domestic interest rates and adds pressure on the Indian rupee, particularly with the upcoming closure of the FCNR(B) deposit window which had attracted over $72 billion in foreign funds.
While India's 10-year government bond yield has risen by approximately 40 basis points over the past year, it has fallen 24 basis points over the past three years. On Wednesday, it settled at 6.97 percent, touching 7 percent intraday, compared to 4.81 percent in the US, 3.027 percent in Japan, 5.24 percent in the UK, and 3.37 percent in Germany. Despite the calm in Indian yields due to strong domestic demand from banks, insurers, and provident funds, the pressure from global repricing is manifesting in foreign capital flows and currency movements, rather than immediately in yields. The current India-US yield gap, at a multi-year low and below its long-run average, is already aggravating foreign debt outflows, highlighting that the protection against global sell-offs has thinned.
