India yield spread vs US Treasuries at 20-year low

That matters because the yield gap is one of the key reasons global funds hold Indian government debt despite currency risk and still-elevated domestic inflation. When that premium compresses, the relative carry on Indian bonds falls just as US yields become more competitive, raising the cost of staying exposed to rupee assets.

The current spread is back in territory last seen in the early 2000s, when it traded in the 190-210 basis-point range on 134 occasions, mostly between 2002 and 2005. The gap had not returned to those levels after March 29, 2005, until it briefly did so again on Jan. 7, 2025.

A narrower spread can also complicate India’s funding outlook. Foreign investors tend to demand a more generous return to compensate for currency depreciation and policy uncertainty, and a shrinking buffer can weigh on demand for local bonds even if domestic yields remain relatively high by global standards.

Traders will be watching whether the Reserve Bank of India responds if the gap continues to compress. Economists have already pencilled in a rate increase at the Oct. 2-5 policy meeting, after inflation rose to an eight-month high of 4.82% in August.

For investors, the next test is whether US yields keep climbing and whether Indian policy moves fast enough to preserve the country’s bond-market appeal. If the spread tightens further, the pressure would likely fall first on the rupee and on foreign inflows into Indian debt.