India suffers worst bond selloff since 2022 as yields surge in August

India is scrambling to contain its bond market after yields spiked in the biggest selloff since 2022.

The Reserve Bank of India (RBI) is now weighing moves to calm markets after a brutal August saw the 10-year benchmark yield climb nearly 20 basis points, data from Bloomberg showed.

Traders blamed a mix of fiscal pressure, tax cuts announced by Prime Minister Narendra Modi, and the fading chance of a near-term rate cut following better-than-expected growth numbers.

Analysts believe the RBI may step in by buying government securities in the secondary market or by rejecting bids at auctions.

A. Prasanna, chief economist at ICICI Securities Primary Dealership, said the RBI “should be somewhat worried about the pace of rise in yields,” adding that it “can give soft signals like statements or marginal screen purchases to ensure smooth functioning of the bond market.” Prasanna pointed to open market operations as the likely first step.

RBI weighs auction rejections as pressure builds

Nathan Sribalasundaram, analyst at Nomura Holdings, said the RBI could also allow the call rate to ease, improving carry for bond investors. He added: “Support could come from an adjustment to the supply. Near term, bids could be rejected at the bond auctions.” The central bank hasn’t officially commented on any of the proposals, and a spokesperson did not respond to requests for input.

Government spending numbers released Friday showed India’s fiscal deficit has already hit 30% of the full-year target within the first four months through July, almost double last year’s pace of 17%. That growing gap is pushing up borrowing costs across the board. The damage has already started spilling into the private sector. Companies like Bajaj Finance and Housing and Urban Development Corp. (HUDCO) have shelved plans for fresh bond sales, local media reported. With borrowing costs rising and demand collapsing, firms are now sitting out.

The yield-repo spread, the difference between the 10-year bond yield and the central bank’s benchmark rate, has also widened to its highest level in over two years, according to analysts at Australia and New Zealand Banking Group (ANZ). That suggests tighter financial conditions ahead, even before any new shocks from tariffs or policy changes. And as bond yields climb, liquidity gets more expensive, leaving both government and private borrowers squeezed.

Rupee under fire, traders see more pain

The Indian rupee is under serious pressure too. It closed at a record low of 88.3075 per dollar on Friday and is expected to stay weak on Monday.

The one-month non-deliverable forward hinted at a small move from Friday’s level of 88.1950, but traders warned the breach of the 88 barrier has already given speculators more room to attack.

A senior treasury official at a mid-sized private sector bank said the RBI likely held back from defending the rupee more aggressively after nearly $950 million in foreign equity outflows hit the market on Friday.

That, plus strong dollar demand from importers and concerns tied to U.S. tariffs, likely pushed the RBI to allow the drop.

This comes as global bond markets are also under strain. In the euro zone, long-dated bond yields rose sharply on Monday, with Germany’s 30-year yield climbing to 3.378%, the highest since August 2011. Yields in France and the Netherlands moved in sync with Germany’s, also hitting 14-year highs. Data showed August brought the biggest monthly jump in long-dated euro debt in five months.

Over in the U.S., the 30-year Treasury yield rose 4 basis points on Friday before the Labor Day holiday shuttered markets on Monday. Germany’s 10-year yield, seen as the benchmark for euro zone bonds, rose to 2.75%, while France’s equivalent climbed to 3.53%. The spread between the two widened to 78 basis points, the highest since April, as political risks in France weighed on investor confidence.

European Central Bank President Christine Lagarde addressed those concerns on Monday, saying she was “looking very attentively” at the widening French bond spreads, but added that France was not yet in a position that would require IMF intervention.

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