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Bonds are caught between domestic and global catalysts, which has kept the 10Y yield within 6.9-7.05% in recent sessions, although off recent highs. Risk rallies lost momentum as hawkish FOMC messaging drove markets to bring forward rate-hike expectations, though RBI MPC minutes reinforced our expectations that policy tightening risks are not imminent. Of note, Governor Malhotra’s mention of benign core-core (core excluding metals) prints underscores the preference to see through supply-side shocks. Oil prices have retreated sharply from May highs as industry reports point to an increase in the tanker movement across the Strait of Hormuz (albeit at a quarter of pre-conflict volume), but severity of the El Nino phenomenon and its impact on domestic monsoon - aggregate rainfall ~43% below normal as of 22-June – by extension. summer crop is under watch (India: El Niño’s rain check). System liquidity has meanwhile tightened sharply due to advance tax outflows, although conditions are expected to improve once non-resident FCNR(B) inflows start coming through. Official clarity is awaited on specific provisions, including the leveraged deposit structures, which will help draw in material flows. In the meantime, the rupee has retained its recent gains, while foreign investors have turned constructive on INR debt, with inflows exceeding $3bn since April 2026. Sentiment has been supported in part by expectations that Indian government bonds could be considered for inclusion in Bloomberg’s global bond indices. We expect the next leg of gains in the INR bonds and currency on a pickup in non-resident deposit and offshore borrowings, spurred by the concessional swap facilities.
The India–US trade framework, initially agreed upon in February, is now in the final stages of being formalized through an interim trade agreement. The government has pushed for comparative tariff advantages vs regional manufacturing peers and sought assurances that the US administration will not levy higher duties once the deal is sealed. There has been notable change in the tariff backdrop after the court overruled the IEEPA tariffs earlier in the year, which was replaced by a 10% blanket rate until 24-July, while Section 301 investigations point to 10-12.5% tariff on selected product groups. US Trade Representative Jamieson Greer will reportedly be in India on June 23-24 to close discussions, with India’s authorities likely to emphasise on better terms than February to get a larger bite in bilateral trade and investment commitments. US officials had previously suggested that India had committed to buy $500bn worth of US products in the future, implying a ~9x increase vs FY26 run rate that seems to be a tall order. The US remained India’s largest export destination in FY26 with a 19.8% share, but growing a modest 1% yoy in the face of high tariffs.
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