Indian government bonds held their ground on Monday, with the benchmark 6.94% 2036 bond yield at 7.0614% by 11:00 a.m. IST, barely moving from Friday's close after rising 31 basis points over five weeks - its longest weekly rising streak in about a year. As reported by The Economic Times, oil slid to a more-than one-week low in Asian trade, on rising prospects for diplomacy over the Iran war and recovering in Saudi shipments, helping counter domestic supply pressure. The stability comes despite the Reserve Bank of India's planned ₹250 billion ($2.61 billion) open market bond sale, which is the second of three sales totalling ₹1 trillion, the RBI's first such operation since November 2017. The banking system's liquidity surplus has narrowed to ₹6.19 trillion from a record ₹11 trillion earlier this month.
According to Wealthy's head of products and research Niharika Tripathi, rising bond yields are creating pressure on equity valuations by increasing returns from relatively lower-risk assets and raising discount rates applied to future corporate earnings. As reported by Mint, the US 10-year Treasury yield has moved close to 5%, while India's 10-year government bond yield has risen to around 7.1%, making the global and domestic fixed-income backdrop materially less benign for equities. However, Tripathi emphasizes that the sustainable P/E multiple for the Nifty depends not only on bond yields but also on earnings growth, inflation, the equity risk premium and the quality and visibility of corporate earnings.
Tripathi explains that if earnings grow at 15% but the P/E multiple contracts by 10%, the price return would be substantially lower than the underlying earnings growth. As reported by Mint, if the Nifty were valued at 20.5 times earnings and the multiple declined to 18 times, earnings would need to grow by roughly 14% simply to offset the valuation compression and keep the index price broadly unchanged. A sharper de-rating to 17.5 times would require earnings growth of about 17% to provide a similar offset. The market has already been relying on earnings growth to support valuations, with recent commentary putting the Nifty's valuation at around 20.5 times earnings, though estimates vary by methodology.
The RBI is confronting a tougher global rate backdrop as major central banks, including the Federal Reserve, European Central Bank and the Bank of Japan, signalled further tightening to contain inflation. As reported by The Economic Times, that shift pushed global yields higher, with the 10-year US Treasury yield at 5%, a level last seen during the 2008 financial crisis. Traders now increasingly expect the RBI to raise the repo rate in October to keep real rates positive, with the one-year rate flat at 6.07%, the two-year rate falling 0.5 basis points to 6.2750%, and the five-year rate easing 2 basis points to 6.56%. The 5Y5Y forward real yield has now reached 2.83%, suggesting the market continues to price in a higher neutral rate further out, with the 30-year Treasury yield and 5Y5Y forward real yield historically moving closely together.
A concerning divergence is emerging between inflation expectations and market pricing, with the Cleveland Fed's 10-year inflation expectations model rising to 2.57% while the 10-year breakeven rate remains flat at 2.33%. As reported by Investing.com India, this divergence runs counter to historical patterns where the market typically moves first, followed by the Cleveland Fed model. The market's estimate of the future neutral real rate continues to rise, with the 5Y5Y forward real yield at 2.83%, suggesting the move in long-term rates is not simply about inflation expectations or near-term Fed policy but reflects a fundamental repricing of the economy's sustainable real rate. Headline CPI is expected to rise 0.6% month-on-month in September, with data suggesting this change may not materialize, but the broader trend shows 63% of core PCE spending in categories where prices are rising faster than 3% year-on-year, indicating this is not just an energy story.
