Yield Gap Narrows After a Decade
The difference between India’s and the United States’ 10-year bond yields has significantly decreased over the past decade (see image below). In 2014, this gap was approximately 6.35%. Today, it has narrowed to less than 2%. This shift illustrates how economic and interest rate policies have evolved in both countries over the years.
Source: Nilesh Shah on X
India’s Strong Monetary Management
In recent years, India has effectively managed its inflation and interest rates. India’s yield has dropped from around 8.5% to 6.3%, while the U.S. 10-year yield has increased from about 2.4% to 4.4%. This trend highlights how India’s stable monetary and fiscal policies have successfully lowered interest rates. In contrast, the U.S. has been compelled to raise its rates to combat inflation, especially after a prolonged period of near-zero rates.
Implications for the Currency
The narrowing of the yield gap could indicate increased stability for the Indian rupee. Historically, the rupee depreciated by 3–5% each year against the U.S. dollar. However, with the yield difference now less than 2%, such consistent depreciation may occur less frequently.
Impact on Foreign Investment
This change also affects foreign investors. Previously, they could achieve higher returns by investing in Indian bonds, but they faced potential losses due to rupee depreciation. Now, while returns are not as high, the currency appears to be more stable. This development may make Indian bonds more appealing to long-term investors seeking both safety and steady returns. A more stable yield and currency environment may lead to increased inflows, deeper markets, and greater long-term confidence in Indian bonds.
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