India's benchmark 10-year government bond yield is expected to rise to 7.35% by the end of November from around 7.25 today, as elevated crude oil prices, inflation concerns and expectations of further monetary tightening are likely to limit the recent rally in government bonds.

The median forecast in a 91bps poll of 10 treasury officials and economists suggests an increase of 9–10 basis points from current levels, despite easing crude oil prices and relatively stable US Treasury yields helping bonds recover sharply in the first three trading sessions of November.

The central forecasts range from 7.25% to 7.45%, with poll participants identifying developments in West Asia, domestic inflation, and the Reserve Bank of India's monetary policy outlook as the principal factors likely to determine yields.

Expectations of a 25-basis-point repo rate hike in December are largely priced into government bonds. However, the possibility of further tightening, particularly if inflation remains elevated, could keep yields under pressure.

"The 10-year yield is expected to trade around 7.35% by end-November, with the December rate hike largely priced in. If the hike does not materialise, yields could fall towards 7.10–7.14%, provided crude falls below $80 a barrel," said Alok Singh, Group Head-Treasury at CSB Bank.

October consumer inflation is expected to exceed 6%, reinforcing concerns that elevated energy costs could translate into broader price pressures. Concerns over the drought announcements have added to inflation risks, as adverse agricultural conditions could push food prices higher and complicate the RBI's efforts to contain price pressures. While overnight indexed swap rates reflect expectations of around 50 basis points of tightening, some market participants expect the RBI to raise rates by only 25 basis points in December.

Crude oil remains the biggest uncertainty. Although the recent decline in prices has offered relief to the bond market, renewed escalation in West Asia could push oil prices higher, worsening India's inflation outlook and external balances.

A sharp decline in crude oil prices could, however, bring the benchmark yield towards 7.20%, with some respondents seeing scope for a further fall to 7.10–7.14% if oil drops below $80 a barrel and the RBI refrains from raising rates in December.

Another overseas development may also influence domestic yield trajectory. Democratic control of both chambers of Congress may constrain fiscal expansion and ease pressure on US Treasury yields, potentially improving the attractiveness of emerging-market debt.

However, the impact on foreign portfolio flows remains uncertain, as US fiscal policy, geopolitical developments and the dollar's trajectory will continue to impact investor sentiment.

Foreign portfolio inflows into India have shown signs of improvement in the last few sessions, and easing global uncertainties could encourage sustained investment in domestic debt. Some respondents expect inflows to strengthen after December as demand for dollars linked to US debt issuance and initial public offerings moderates.

The outlook for shorter-maturity government securities remains mixed. While surplus banking system liquidity and the absence of recent RBI open market sales could provide temporary relief, expectations of further policy tightening are likely to limit gains.

Short-term rates, particularly Treasury bill and certificate of deposit rates, have risen amid tighter liquidity conditions. Some market participants expect these rates to ease if banking system liquidity remains in a surplus of 1–2 trillion rupees, while others expect the one- to five-year segment to remain under pressure until the tightening cycle approaches its peak.

"With the December hike yet to come and further tightening still possible, the 1–5 year segment is likely to stay under pressure," said Alok Sharma, Head-treasury at ICBC India. "A durable rally at the short end would need clear signs that the cycle is nearing its peak."

Banking system liquidity could moderate to around 1 trillion rupees by November 15 as RBI foreign exchange intervention and festive-season currency withdrawals drain funds from the system.

For the benchmark 10-year gilt, the recent recovery may have eased immediate selling pressure, but elevated crude oil prices and expectations of further RBI tightening are likely to keep yields above current levels by November-end.

The following are the estimates for the benchmark 10-year gilt yield at the end of November:

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