India’s 10-year benchmark bond yield rose to its highest in two weeks to 7.88 per cent – previous close of 7.85 per cent – after a news report quoted a senior finance ministry official that the central bank might have to raise interest rates to keep inflation in check.

The 10-years’ G Sec yields have moved up quite sharply since the April policy while most top banks have raised their lending rates too. Globally too, it looks like that the interest rates will increase and the Fed will go in for another 3 rate hikes. FPI flows have already witnessed the impact under these conditions.

“The US yields have moved up and even crossed 3 per cent which means that RBI will have to keep interest rates up to ensure that FPIs retain interest in Indian markets,” said Madan Sabnavis, chief economist at India Ratings.

The rupee also has been volatile and tending towards weakening which means that interest rates have to remain high to protect the external account by bringing in forex. The rupee has been falling almost continuously by almost 3 per cent in the last two months, and also crossed the psychological mark of Rs 68/$. The oil price hike along with negative FPI flows has contributed to this phenomenon. A weaker rupee and rising interest rates in the west makes India a less attractive market for FPIs. In fact, post March forex reserves have come down by $ 11.7 billion to $ 412.8 billion.

“A mix of global and domestic factors such as risk aversion among global investors, crude oil price volatility, higher borrowing by the state governments and a likely fiscal slippage by the central government have driven bond yields higher. The 91-day Treasury bill rates increased to 6.4 per cent in May 2018 from 6.11 per cent in April 2018, while the 10-year G-sec rate rose to 7.88 per cent from 7.15 per cent during the same period,” said Devendra Pant, chief economist at India Ratings.R