Indian government bonds weakened on February 12, tracking the rise in United States Treasury yields after better-than-expected American jobs data reduced the probability of an imminent rate cut by the US Federal Reserve. The reaction underlines how tightly domestic fixed income markets remain linked to global rate expectations, especially at a time when policy cycles across major economies are still in flux.

The benchmark 10-year government bond yield rose to 6.7276 percent, up from the previous close of 6.7088 percent. Since bond prices and yields move inversely, the uptick in yield reflects selling pressure in sovereign debt.

The trigger came from the United States, where employment data surprised on the upside. The US economy added 130,000 jobs, significantly higher than the 70,000 forecast and marking the strongest pace since December 2024. The data suggests that labour market conditions remain resilient, limiting the urgency for the Federal Reserve to pivot towards rate cuts. Rising US Treasury yields, in turn, exerted pressure on emerging market bonds, including India’s.

For Indian bond traders, the external signal is clear. If the Federal Reserve maintains a higher-for-longer stance, global liquidity conditions are unlikely to ease rapidly. That narrows the room for aggressive rate cuts by other central banks and could keep capital flows sensitive to yield differentials.

However, domestic factors are now equally critical. Investors are awaiting India’s January inflation print, which is expected to show annual inflation rising for the third consecutive month to 2.4 percent. While still moderate by historical standards, a steady upward drift in inflation could influence expectations around the Reserve Bank of India’s policy path.

Notably, the upcoming data will be the first inflation release under the new 2024 statistical series. Any base revisions or methodological adjustments could alter trend interpretations. Markets typically tread cautiously around such transitions, as recalibrated data can affect both real yield calculations and medium-term inflation expectations.

In its February policy review, the Reserve Bank of India revised its inflation forecast for the current fiscal year upward to 2.1 percent from 2 percent earlier. At the same time, the central bank kept the repo rate unchanged at 5.25 percent. The combination signals that while inflation remains contained, the RBI is not yet prepared to shift decisively toward policy easing.

The central bank’s stance appears data-dependent. A modest upward revision in inflation forecasts, even if small in magnitude, suggests vigilance. With global uncertainty still elevated and food price volatility lingering in parts of the economy, policymakers are unlikely to pre-commit to rate cuts without sustained evidence of price stability.

For markets, the interplay between US and Indian rate expectations is shaping yield dynamics. If US data continues to surprise on the upside, upward pressure on global yields could persist. In that case, Indian bond yields may struggle to ease meaningfully even if domestic inflation remains benign.

On the other hand, if India’s inflation trajectory stabilizes below projections under the new series, and global conditions soften, the case for a gradual easing bias later in the year could strengthen. That would support bond prices and compress yields.

In the immediate term, rising bond yields can tighten financial conditions marginally. Higher sovereign yields often transmit to corporate borrowing costs, influencing bank lending rates and debt market pricing. For equity markets, especially rate-sensitive sectors such as banking, real estate, and infrastructure, sustained upward pressure on yields can weigh on valuations.

At the same time, a moderate rise in yields driven by global factors rather than domestic stress does not necessarily signal systemic risk. Indian macro fundamentals remain comparatively stable, and inflation expectations are still anchored.

Banking and financial services could see mixed effects. Higher yields may improve treasury income volatility in the short run but can compress mark-to-market gains on bond portfolios. Infrastructure and capital-intensive sectors could face slightly higher funding costs if the yield uptrend sustains.

Export-oriented sectors may be less directly affected by bond movements, though global monetary conditions can influence currency flows and risk appetite.