Tightening India-US 10-year bond yield spread puts rupee under pressure

One of the key factors contributing to the decline in the value of the rupee against the US dollar is the tightening yield spread between the 10-year India government bond and the US government bond.

The yield on 10-year Indian government bonds is now only 295 basis points higher than that of US 10-year treasury bonds, the lowest since January 2007.

Lower spread means lower incentive for foreign investors to invest in rupee assets, which adversely affects foreign capital inflows into the country and weighs on the rupee-dollar exchange rate.

For comparison, the yield spread was 4 per cent or